The Unexpected Costs of Misclassified Trade Codes for a Major Bag Manufacturer

As President Trump's latest trade tariffs are being enforced, businesses are finding themselves meticulously examining their entire inventory and diving into obscure import codes to find potential cost reductions.

The well-known beach tote producer, Bogg, faced a jarring realization when a simple examination of their keychains led to an unexpected discovery. CEO Kim Vaccarella’s team identified a zinc alloy keychain that had been mistakenly categorized as stainless steel according to the Harmonized Tariff Schedule (HTS).

This misclassification resulted in duty rates being 30% higher than they should have been, as Vaccarella explained to Business Insider.

“Trading is challenging enough without these incorrect charges adding confusion to the mix,” she commented.

The HTS is a comprehensive reference, containing approximately 20,000 different product codes that merchants need to navigate.

Before the tariff increases under Trump's administration, the majority of products were taxed between 0% and 7%, maintaining an average US rate of about 1.4%, according to trade lawyer Scott Maberry from Sheppard Mullin. With a new baseline tariff of 10% coupled with additional country and product-specific duties, this average has surged towards 18%.

Mastering the Challenge: Redefining and Engineering Around Tariffs

To manage these challenges, companies are increasingly resorting to ‘tariff engineering’ – a legitimate strategy involving alterations to the material composition, product design, or usage to qualify for a lower duty classification.

Emil Stefanutti, the CEO of the trade-tech firm Gaia Dynamics, highlights how one client repositioned a beanie’s wool content fraction to slip into a more favorable tariff group. "By simply boosting the wool content fraction slightly over the threshold, the client lowered costs by 4.2% per item," stated Stefanutti.

Vinny Licata, responsible for logistics and import compliance at Fictiv, a digital manufacturing platform, points out that classification might also hinge on how the item is applied. "For example, differentiating between a motor used in medical equipment versus one used in an automotive application can alter the applicable duty rate," he noted.

Major retailers are keenly aware of these strategies. During a recent earnings call, Doug McMillon, CEO of Walmart, disclosed that their suppliers are creatively substituting tariff-affected materials like aluminum with non-tariff materials such as fiberglass.

The Cost of Missteps in Classification

Given the enormous range of over 20,000 product classifications from footwear to electronic circuits, incorrect assignments happen frequently and can be financially draining.

“It's akin to miscalculating your taxes,” Stefanutti explains. "In most locales, inaccurate tax claims can lead to serious repercussions."

A similar principle applies to HTS code mistakes, where the incorrect classification can distinguish between manageable duties and exorbitant surcharges.

Moreover, these mistakes can invite fines, seizures, or damage to reputation if customs authorities determine an importer has violated protocols.

Errors might initially incur costs related to the owed duties or a portion of the value of the goods. However, gross negligence can significantly increase exposure, with fraud carrying penalties up to the full shipment value.

A recent high-profile case involved Ford, which in March 2024 was obligated to pay $365 million after being found guilty of misstating van classifications to evade a 25% tariff.

Heightened Scrutiny and Strategic Responses

To avoid missteps, importers are not just aiming to decrease tariffs but ensuring compliance is kept tight. The Department of Justice’s recent memo highlights trade and customs fraud as a significant enforcement focus.

This increased vigilance has resulted in Maberry’s firm experiencing a 35% rise in inquiries about classification adjustments monthly since the 2024 election.

Stefanutti notes a sharp rise in requests for audits within Gaia Dynamics, with such tasks now comprising 40% of their activities. Previously, the focus was on classifying new imports, now, businesses emphasize comprehensive reviews of existing inventory to affirm accurate classifications.

Licata from Fictiv emphasizes customer requirements for transparency regarding how product classifications and corresponding tariffs impact overall costs.

His pragmatic guidance to clients emphasizes considering the total cost from product origination to final delivery rather than just specific tariff percentages.

Licata underscores the inevitable increase in labor costs, stating, “Importing to the US involves unavoidable expenses, but optimization and management of these costs are key.”

In response, Bogg has begun diversifying its production footprint. Historically reliant solely on Chinese manufacturing, the company is gradually moving operations to include Vietnam, with a target of decreasing Chinese production to under 50% by the next year.

With their annual revenue having reached $100 million, Bogg had set a $170 million target for 2025. However, the combination of tariffs and disruptions in supply chains pose a notable challenge to this ambition, as stated by Vaccarella.

Despite financial pressures, Vaccarella remains reluctant to pass increases onto customers. Instead, meticulous attention to detail, particularly in ensuring correct HTS code usage, has become vital in guarding business margins.