Does it work? Can I do it legally? With the right precautions, yes, so let's get down to business.
Starting with the basics, what is tariff engineering exactly?
The concept of tariff engineering was developed in the 1800's when high levies on certain imported parts became costly. Companies began sourcing or altering a product by choosing an alternative material or combination of materials that resulted in a different HTS classification with lower duties.
Legitimate tariff engineering means structuring products to achieve favorable duty treatment upon import. It is the process of product design to reduce duties, taxes, and fees associated with importing.
Why would you engage in tariff engineering? Simple. It saves your company money.
Ideally, tariff engineering should take place at the start of the design process, but needs to encompass other important factors, such as:
- Cost of materials
- Cost of manufacture
- Marketability
- Safety
Example: Converse sneakers are one example of how a company can do this legally. For years, the sneakers have added felt on the bottom of their sneakers for no other purpose than to qualify for a lower duty rate of 3% instead of 37.5%.
Example: Let's say you have two shirts with different blends of cotton and polyester. A t-shirt that is 55% polyester/45% cotton blend is classified as polyester and has a duty rate of 32%. Turn around and engineer the garment to have 55% cotton/45% polyester, the result is a lower duty rate of 16.5%.
How can product designers and compliance partner?
Product designers need to know the duty impact on their products from the get-go, so teaming up with a Customs compliance team or an outside partner is vital.
If the original specifications point toward a high duty rate, through collaboration and idea sharing, they can determine whether there is an alternative design that would achieve the same or similar results while delivering a lower duty rate.
If components can be switched to make the same product with the same quality, at a similar cost and durability, and provide a lower duty rate upon import, then this could be a competitive advantage.
What are the main considerations when tariff engineering?
You'll need to consider the following:
- Are there technical specifications or design features that cannot be altered?
- Can your classifiers research similar materials for consideration?
- Is it possible to import from a different country?
- Will it cost more to make the change than the duties you're paying?
- Ensure your tariff engineering efforts are legitimate.
Take caution in how much the product changes after import, like in the 1991 feather duster case. Refrain from adding something to a product, or importing it as one item, to then completely change it after the fact to get a lower duty rate.
That is where you could run into a sticky situation with Customs, as it is clear that "artifice, disguise, and fictional products" are not acceptable when trying to avoid certain duties.
What's Next?
- Get together with your product designers and your trade compliance team.
- Evaluate and assess areas where you might modify the components to achieve a more favorable duty rate.
- Prepare to defend your product and its classifications should you be required to justify your classifications in court.
- Work with your Customs broker to seek guidance, proper classification, and consider the binding ruling program.
When you conduct your research and cross-collaborate on product design, you have the chance to discover cost-savings during product development. Keep in mind, HTS classifications overall are updated on an annual basis and regularly throughout the year as new regulations and products develop, so keeping abreast of changes is imperative. Together with your broker you can ensure proper classification and avoid costly mistakes.
