Have you ever been stuck preparing a shipment because you couldn’t find the right commodity code? You are not alone.
Many global sellers are struggling with commodity codes, and for a good reason. It is confusing to understand when you need it, what type of code you need, or where to find it.
Yet, commodity codes are a foundation of global trade. Allocating the right commodity code is the first step to compliance, so not to overlook.
Let us take you through commodity code essentials! You will be all set to send your packages in full compliance. We will answer the top 5 questions global sellers ask about it.
What is a commodity code?
First things first, a commodity code is a tax code that determines the type of goods you are exporting.
A specific commodity code is granted to goods according to their nature, type, and purpose. The commodity code is, therefore, a standardized classification system. We use it worldwide and it ensures a uniform classification of goods.
The World Customs Organization (WCO) created this system in 1988, and updates it every 5 years. The latest update occurred this year, and it includes major changes you should check out.
Commodity codes are mainly used by Customs authorities. They determine the duty and taxes based on commodity codes. It also helps countries to regulate trade. With commodity codes, they know what is transiting across their borders.
Do I need a commodity code?
Over 200 countries use the commodity codes system. In addition, over 98% of the goods traded internationally have a commodity code. So, the answer is yes, you will need to add a commodity code anytime you send a package across borders.
And it makes sense: the exact same products have different names in each country. Universal classification is thus the only way to prevent international business from chaos.
Commodity codes are necessary to fulfill several compliance requirements. More precisely, you will need it to:
- Complete declarations and other paperwork
- Find out if there is any duty or VAT to pay
- Check if there are any duty reliefs
Therefore, if you don’t have a commodity code, this means that no one knows what to charge for duty and who should pay the VAT. This can lead to serious legal issues, and your goods will never reach your customers.
Is commodity code the same as HS Code?
Commodity code, HS code, HTS code, TARIC code… All these terms sound confusing, so let’s shed some light. The main difference is the number of digits and the country where the good is exported.
Commodity codes refer to the harmonized tax code in a broad sense. HS codes, HTS codes, TARIC codes can all be referred to as commodity codes. This is why you can see commodity codes of different lengths: from 6 to 10 or even 12-digit numbers.
HS codes are 6-digits codes recognized worldwide, they are exactly the same for every country. Countries are also allowed to extend HS codes with an extra 2 to 4 digits to have more targeted tariff policies. These extended codes can have different names such as HTS code or TARIC code.
For example, The United States uses the HTS codes system. Their HTS codes comprise 4 extra digits in addition to the 6 harmonized HS digits. The EU uses a CN code for exports that has 2 extra digits in addition the HS6, and a Taric code for EU imports with 10 digits in total (HS6 + 2 + 2).
How do I find a commodity code?
You can decide to find the right commodity code for your products manually, on your own. To begin with, you will need to know where to search for the code depending on where you are exporting your goods. As we saw, some countries use extended HS codes. You will therefore need to check the HS or HTS database depending on where you operate.
However, going through this process manually can quickly become a nightmare. The HS Nomenclature comprises about 5,000 commodity groups and have 99 chapters. You may lose time and energy trying to dig into a host of digits.
To make matters worse, HS classification is not always straightforward. It is structured in sections, chapters, headings, and subheadings. Their interpretation might vary between countries and customs authorities.
If you are not attentive enough, some subtle product differences may also cost you a lot. For example, the commodity code for potatoes is different if they are fresh or frozen. Fresh potatoes are classified under the header potatoes. Frozen potatoes are classified under the header Vegetables. Unfortunate consequences for such a small detail.
Given the complexity of commodity codes, it makes sense to use an automated tool. Eurora’s HS Code Allocation service can save you a lot of time, and make sure you are not allocating the wrong code.
What happens if I use the wrong commodity code?
Commodity code allocation is the backbone of cross-border trade. Correct export laws to follow, and duty and tax rates can only derive from commodity codes. If you use the wrong commodity code, it will therefore have a domino effect.
You will pay incorrect VAT or duty, and if you pay too little this will be considered a fraud, and you will have to pay fines. Consequences could be even worse if you export items that need a license. If you export restricted goods with the wrong commodity code, you will break the law and be in serious legal trouble.
These consequences will also affect your clients and your reputation. The package might be delayed or seized by customs. Or clients could have to pay extra costs to receive their package.
It is also important to keep in mind that customs regulations are dynamic. They constantly evolve and change. Staying up to date on those rules when trade compliance is not your main activity is hardly bearable.
That is why an automated solution seems to be your way out to avoid penalties.