Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

All right. I'll tell you what, it's 2 afternoon. What we're going to do is get started. So good morning, everybody. Thank you for joining Tradewin’s Duty Management Fundamentals: HTS Classification Webinar, hosted by Expeditors today. My name is Kevin Cornell. I'm the district sales manager for Philadelphia. Before we get started, I just want to go through a couple of ground rules for today's webinar. First of all, the webinar is going to be recorded. So if you have any questions at any time, please signal in the Q&A box. Questions will be answered at the end of the presentation. There may be some questions that we will be able to answer during the presentation as we have an extra person on board from Tradewin that could answer any of the general questions. All the attendees are anonymous and placed on mute. Today's webinar again, will be recorded. You'll receive an e-mail today containing a link of materials presented today and a survey. Your feedback is valued to us. So, we ask you to complete the survey found the webinar or through the e-mail, a follow-up e-mail. One of the things we use for, is to guide us in the additional subject matter. So I believe our feedback is very important to Expeditors. So now let's get started. Speaking today, we have Matt Springate of Tradewin, and I'm going to hand it off to him to take it away.

Thank you, Kevin, and good morning, everyone, and thank you for joining. We've got 127 people on the call, which is a really fantastic turnout. So, thanks for taking some time out of your morning to talk to us and learn a little bit more about the fundamentals of HTS classification. Also, a big thank you to expeditors and the Northeast regional team for sponsoring and supporting this webinar. This webinar is the first in a series of webinars and we're going to do it over the next 7 days, really focusing on duty management fundamentals. So, there are some core functions or data elements that companies in determining their duty liability, you need to look at and take into account as part of making sure they're paying the right amount of duty to U.S. customs, but also want to make sure they're mitigating duty appropriately whenever profitable through programs like Free Trade Agreement Use or Duty Drawback and we've got some colleagues that will talk about those things on some subsequent calls next week. Just by way of a brief introduction to myself and then to Tradewin as an organization. As Kevin said, my name is Matt Springate, I'm the principal of Tradewin's U.S. consulting practice, and based in Boston, Massachusetts. I've been with the organization for about 12 years. I'm a licensed customer for over here in the U.S. I'm currently getting over a cold so, I've got a big mug full of Tradewin tea. And if I get into a coughing fit in the middle of this, please excuse me, and I'll be you right back with you. A little bit about Tradewin and in terms of who we are as part of the Expeditors organization. So, we're actually a wholly owned subsidiary of Expeditors and we legally, financially, and operationally Act independently from Expeditors as a parent organization. And what we do is, we provide a variety of different customs and trade compliance consulting solutions here in the United States, but in 17 other countries around the world in 30 other offices and our services are quite broad in nature. So, we really focus on advisory consulting services, both on the import and export side, helping companies set up duty mitigation programs like Drawback or look at value adjustments through reconciliation, help with setting up Trade Preference Programs, and managed service programs. But as core and as part of all of that, we really look at and focus on tariff classification as a primary driver of a lot of information that customs both want to obtain on importers from a taxability perspective but also from an admissibility perspective. So thinking kind of broadly about why classification is important as an importer, both to you as a representative of your organization, but also to customs as the recipient of that information through the 7501 processes. The classification is really the key data element and driver of a lot of different things for U.S. customs in terms of figuring out the duty ability of a product, the admissibility of a product as well as the statistical information that that product is demonstrating as part of that classification that U.S. customers port protection wants to collate and connect as part of their broader trade statistics. As a result of that, with the way that customs thinks about classification and the importance of the classification in the supply chain, is just the same as they would think about the accuracy and validity of filing and making sure a 7501 is accurate. Of course, the classification is a key data element on 7501. But U.S. customs actually consider classifying merchandise to be transacting customs business. So, in their mind, making a classification determination is no different than filing a 7501 in terms of working under that customs business umbrella. What that means in practice is that there are specific parties to a supply chain transaction that can or should be a part of that classification determination process. As an example, the customs business definition by its nature and the way that it's codified in regulations in the United States means that, the classification really needs to be decided and agreed by either the import or record directly, or a third party that is domiciled in the United States and is licensed to provide that level of information, right? So again, it really speaks to the importance that U.S. Customs puts in place in terms of making sure that they want to see that classification in a done accurately and completely. So, what are some things that the classification drives? Well, common, and as everybody knows, the classification is going to drive the duty ability of the merchandise. Duty rates in the United States as compared to other countries in the world can be quite high depending on what the quality is. And this is just talking about normal duty rates, not things like through duties from China or additional duties like antidumping or countervailing duties. If you look specifically at the U.S. tariff schedule, there can be duty rates that are duty-free to up to potentially 38% duty, all driven by that classification determination on the important merchandise. So, it's critically important to make sure that it's done accurately. In addition to the normal duty rate, there is, of course, the 301 duty rate or other additional duty rates that are driven by the classification and then what we consider to be the country of origin. I think most people are familiar with, but if not familiar, 301 refers to additional duties that are levied on products that are country of Orange in China when imported into the United States and the duty rates of those additional duties, both normal duties can vary significantly depending on the specific classification. So again, a very important data element in terms of making sure that your land and cost calculation is done correctly. I would also say that there is not necessarily a one-to-one match between classification or classification country origin and admissibility decisions like whether or not a product requires Food and Drug Administration review or USDA review or other reviews from other government agencies, which we now refer to in the post-ACE environment as PGAs or partner government agencies. However, U.S. customs uses the classification in combination with other data elements to drive what we call the PGA flags or admissibility triggers for these different agency requirements. So if, for example, you have a medical product and you're classifying it as a pharmaceutical in Chapter 30, that's going to travel for a Food and Drug Administration review just by the nature of that classification that you've determined, right? Conversely, we don't consider ADD, CBD to be a partner government agency. It is a requirement as part of the customs determination process, but antidumping or countervailing duties, which are levied when we see scenarios where the U.S. government feels like a foreign country or a foreign industry is selling product at below market rates or below production value in the United States to harm the U.S. industry, those classifications when combined with the country of origin can act as a potential trigger for saying, hey, ADD or CBD and/or CBD may be due on the century. So, all things being said, the classification is a window into making a decision on the duty ability, overall, and admissibility of the product. And from a risk perspective, not properly classifying can lead to shipment delays. We use UPE unable to process the entry. So, if you got a missing data element on your entry that comes back to you as the importer to clarify before the entry can be filed by your customers' broker. There are a loss of revenue bills that can be levied by U.S. customs duty has been underpaid. They don't love a knock on your door to tell you that you've overpaid duty, but they certainly will tell you if you pay not pay quite enough. There are also fines and penalties for not declaring the correct classification and paying the right amount of duty when shown or demonstrated that a systemic issue. One thing that's important to note in the way the regulations are set up in the U.S. is that, it actually can be more punitive to a company if you misclassify a product, but if the classification of the misclassification doesn't yield a loss of revenue just because in those scenarios, you default to invoice value as the basis for which a penalty is calculated. And then finally, as we talked before, there may be a noncompliance issue with PGA requirements as a result of the classification issue. So, thinking about the baseline of how you determine a classification of what class a patient covers, it's really important to remember that everything on this desk and everywhere has an assigned classification. If you take the tariff schedule in the United States, and those of you on the call who are licensed brokers and taken the test maybe more than 5 years ago before it was -- we had the access to use electronic records, you needed to take a printed out tariff schedule with you to take the test. And if you've ever seen one, it's about this big, if you print it off, double-sided and it incorporates, I believe, over 16,000 unique product codes. And so, any product that you're bringing into the United States or really any other jurisdiction is going to have an assigned tariff code whether or not it's a bushel of bananas or if it's -- it's going to have the tariff code associated with it. And a lot of people say, aren't tariffs codes harmonized globally? Well, yes and no. So, we can talk a little bit about how those tariffs are structured and how it's impacted on a global basis. So here in the United States, tariffs are 10 digits in length. And in constructing those tariffs, the first 6 digits and the nomenclature supporting those first 6 digits is driven by the World Customs Organization. So, any country who's a WCO member is going to share those first 6 digits and the nomenclature supporting those first 6 digits in their own national tariff schedule. However, they're allowed to issue more or keep 6 digits at a national level to drive additional information in order to contain and collect trade statistics, but also to determine duty rates. So, here in the United States, we have 10 in European Union. We have 10 except for Germany, where we have 11. In some countries, we have 8. In some countries, we have 12, we have 14. It just depends on the national level, right? And there's also not a one-to-one match between a classification in the United States and a classification in another jurisdiction. So, this is really a great example where if you look at the tariff heading 7304, which deals with steel pipes, the classifications underneath 7304 and the number of them that you as an importer have to pick vary significantly based on the importing country. And that would strange from an example where in Singapore, there's only 21 classifications where the heading is 7304. But in the United States, there's 139. And within those 139, that's driven because there's different statistics that are trying to be generated by the U.S. government or there might be differences in duty rates that are assigned at a national level or they're looking for additional flag information as part of that PDA review or that ADDC review that we talked about. Another common question that we get is really around -- well, my cloud product is classified with the first 6 digits in this country isn't the same in every other country that's a member of this WCO framework. And the answer to that is, probably, but maybe not, right? In theory and based on the structure, the answer should be, yes. However, we see quite often in practice that there are national and potentially port or customs officer level differences in opinion or an interpretation of how those goods are classified as those first logistics levels. A really common example of that in our industry and particularly in the wearing apparel industry is the differences in interpretation between pullovers as part of women's uppers in the European Union and in the United States where based on guidance documentation, they're different at a 6-digit level in the U.S. as they are compared to in the EU. So, with all that in mind, how do you look at and how do you leverage the tariff schedule appropriately? Well, it's really important to look at and understand how it's constructed. And if you look at that big stack of paper if you go to the U.S. International Trade Commission's website online and download the individual sections. The structure is really based on several different elements. So there's the table of contents, they are the generals of interpretation, which we'll talk a little bit more about in a minute, additional interpretation notes. General notes, which also contain data elements specific to the free trade agreements that the United States as a member to, and the specific rules of specific products or specific transactions need to fall into to meet those free trade agreement obligations. And that's something that Norm Lubeck from our team is going to talk a little bit on Tuesday next week about as part of his webinar on that topic. In addition to that and really where we get into the meat, and potatoes of the classifications and the specific codes that are associated with it, there are section notes and the tariff is broken down into 22 sections. And then there are chapters within those sections and there are 99 of those. Additionally to that, there are appendices that can be referenced, annexes that can be referenced, and then an alphabetical index. And that's just kind of the baseline in terms of establishing and understanding where can be referenced to render those classifications. In addition to that, if we look at what best practices in terms of how to classify a product, you have to use those general orders of interpretation and all of the things that we talked about that are associated specifically with the tariff book but then there are also other regulatory or explanatory information that you can read and consult in order to render a classification. So, there are what are called WCO, World Customs Organization, explanatory notes that are available and speak to the World Customs organizations, interpretation of classification of certain items. Definitions are very important in the classification space. So, common trade or appropriate reference materials spoke to how terms or items are defined are very important in terms of defining how good is classified. But it's also really important to look at guidance provided by U.S. customs as well as prior rulings on other imported products or perhaps your company's products in terms of making those determinations. So, there are what are called ICPs or informed compliance publications that are published and updated by U.S. customs and speak to interpretive information on how to classify given materials. There's not a ton of them. It's in the teens in terms of how many there are, there may be 20, but certain commodity types are more than others. For example, there are a lot of ICPs around textile and wearing apparel classification. So, it's important to really review those informed compliance locations when you are classifying items that are part of those specific commodity types. In addition, there are what are called binding rulings that are on file with CBP on when an importer has gone to CBP and said, "We have a classification. We don't necessarily know the 100% what the classification is. We'd like your opinion on U.S. customs on what it is, and here's our rationale of why we classified it the way that we've classified it in terms of making that decision". Now, those rulings are all available on what's called Cross, which is an online search engine where you can review past rulings that other companies have submitted to look at customs interpretation and guidance in terms of how they made a classification decision. And those are very helpful in terms of looking at and trying to understand prior determinations on what the cassation was. As an importer, you, of course, have the opportunity yourself to file for and obtain a binding ruling on your product. However, it's really important to make sure that whatever ruling you seek, if you get an answer from customs is the answer that must be used, whether you like it or not, right? So, thinking about that classification process, let's also think a little bit more about what you need from a product perspective in order to render a classification. Now, it's important to understand that classifying a product is really a marriage of a couple of things when you look at it being done at a desk level. You have to understand the regulations, you have to understand the previous legal guidance, and you have to understand how that's been done in the past and how that impacts the interpretation of classification issues on your desk. But in addition, you have to have a really good understanding of the product that you're classifying and I would say, it's probably a 50-50 break or match between those 2 things to make sure that the classification is done correctly. So, if you're looking at classifying a product, whether or not it's a bushel of apples or a -- you really need to understand the complete description of the item, the function of the item. So, what is it used for? What is it used in? What's its primary use, all those kinds of things. You may need additional technical detail like Blueprint, drawings, and material data. Sometimes, given the complexity of the product, the visual inspection of the I&M is helpful to make a determination of function and use and also look at, as we talked about cross and CBP and some of these other rulings that are in place as part of making that classification decision. Now, the question then comes from people. Well, okay, if it's 50% understanding the regulations and 50% understanding the product, will surely a lot of different people could be involved in the supply chain in order to render that classification? And while we don't see this as specifically today as we did maybe 10, 15 years ago, there wasn't a time of thought that the supplier or the vendor would be the appropriate person to render the classification, particularly, when it's done at origin or by the manufacturer prior to importing into the United States. The reason for that, as we all know, is that sometimes product records or product information is more accurate at the source material than it is at an imports material in terms of how the product is made or what it does, right? And there's also a thought that having that intimate information about the manufacturing process, the supplier of the vendor can actually do a better job of classifying it. The problem with that, however, is that they are in a different country, and they understand the different countries' interpretation of the classification. They also don't hold any liability for making that classification. So, as the importer of record, if you are filing that 751 and then a cost patient is incorporated into it, but it's not a decision isn't made by you or a licensed party, that party making the decision isn't liable. It's your skin in the game, right? But they have no liability for that classification determination. And in addition, I would say, as part of the new broker responsibility rules that are in place with U.S. customs, U.S. customs also doesn't want foreign suppliers to be running earner in classifications because they are not the import of a record or a licensed provider established within the customs territory of the United States. The second one is, should the engineer designer do it, right? They have product knowledge, but they may not be trained in classification or compliance or classification. And in those scenarios, they either have to be a representative of the imported to do it or a part of a licensed provider to do that as well. There's always been a thought that the customs brokers should be responsible for the classification and the customs brokerage community is very well versed in classification rules as well as the rules in terms of filing compliant entries. The problem with it as it fits in the supply chain is that the nature of the timelines around customs entries is that the customs brokerage simply doesn't have time and they don't have a product information. They probably got the product expertise, surrender the classification for goods that are on the inbound process to make sure it's done accurately. As we talked about, there are outside experts that can render the classification that are specialized in this area. They have to be licensed. They have to be in the United States to do it appropriately as part of the new governing regulations from customs. But of course, there has to be an established and consistent feed of good product information for that outside expert to remember the classification, and there's a cost associated with their use. And then finally, a lot of companies will do this within their own internal compliance department. So, they will have specific analysts and representatives who work within the organization to make classification determinations on behalf of the company, which is 100% allowable, right? But those people need buy-in and resources from suppliers, engineers, procurement, and other companies that have either specific regulatory expertise or specific product expertise that can assist in making those classification determinations, okay? And when we think about -- once we've kind of figured out who's going to under the classification, what information needs to be made available and making sure that we have all of our product detail available, then we get into really the most important piece of the determination process, which is called, 'the general rules of interpretation'. And these are World Customs organization-mandated rules that are established to define the decision-making process of how a company renders a classification and whether or not a classification is applicable or not. What's really important about the general rules of interpretation? And they are WCO structured and incorporated into the U.S. tariff schedule is understanding that they need to be applied in order as they're listed within the regulation. So, you can't pick and choose what GRI you want to use. You have to look at and qualify or disqualify them in order before you get to the appropriate classification, right? So, we'll talk through the GRIs, and then we'll talk through some specific examples of where this general temptation is all in place. So, GRI 1 states for, if a product is specifically provided for, you use it, you apply the terms of the headings, the section, and the chapter notes. What we do is, we call this an EO nominee classification. And what that EO nominee means is that if you've got a specific description of a product that accurately represents its function use and otherwise, and that description is reflected 100% in the tariff schedule, then it's considered nominee classification, cost side under GRI 1. You, of course, need to make sure that you're referring to section and chapter notes, which we might speak to customs definition of terms in terms of how it defines those specific nominee terms. But any EO nominee classification is it says it's there, if it's clearly as it states. If you don't have an EO nominee scenario, you get into GRI 2A, which looks at, hey, is the product incomplete, unfinished, dissembled, or otherwise? We think about this most commonly in the in the IKEA example. So, if you go to IKEA, you take your kids, it's horrible. It's a verbal experience. You need to get a $30 cup. You spend $100 of headache getting through there. But you go to the showroom sheets that you like. You pick up the tag for it, you go to the cafeteria. You have some meat balls you spill some stuff on the floor. Then you go into the warehouse and you find a box where it's uncompleted disassembled, but it's a bookcase. That is classified as a bookcase under GRI 2A because it's packaged in such a way so that it has all of the elements of the bookcase just disassembled, right? However, if you don't have either one of those scenarios and you find a product that is -- you're weighing multiple different classification headings, you're in a 2b scenario, and you have to go to GRI 3 to really determine rendering the classification. So, GRI 3A says, if the product is classified in 2 or more headings, use the more specific heading. And the more specific heading is going to speak to or most closely associated itself with the use of the product, right, or in function. If you don't have that scenario, you go to 3B and say, you have to determine what characteristic of the product in parts, the essential character of the item. And that essential character concept is really looking and saying, in scenarios where you've got a product with multiple functions or multiple uses, what is the primary or main function of that product in terms of determining whether or not it's classified one way or the other. If you don't have that scenario and you're still in a position where you're equally weighing 2 or multiple classifications, the rule is that the product needs to be classified lasts in numerical order. So if, for example, you're reviewing something that's maybe classified in Chapter 39 or Chapter 90 and you've got a 50-50 split on it, you would classify it in Chapter 90. However, I would say most products are going to be classified at a 3A or 3B level in that scenario. And if you've truly got the 3C, it's to your benefit to really take a look at it and see if there's sufficient rulings in place to support another classification or maybe you want to get into a ruling or sell. GRI 4 is kind of a copout from the World Customs Organization, if you're honest, and if I'm honest. And basically, it says, if it's not a GRI 1 or 3, you need to classify the product in the heading most closely related to the item. Now, GRI4 is really determined that were built based on new-to-this-world articles, right? And the structure of the tariff schedule, while it changes maybe 3 or 4 times a year in the United States or there are piecemeal updates that are made in the United States annually. Really, the WCO does a review every 5 years and makes changes to the tariff schedule to incorporate changes in technology, changes in equipment, and changes to what's available on the marketplace to add headings as needed or to specify headings or subheadings to make sure that the tariff schedule really matches goods that are in the middle of commerce, right? However, if you've got a new article and it's not accurately reflected in the tariff schedule, you may be in a GRI 4 scenario where you need to classify to a most closely related heading. GRI 5A is the guitar case example. So, if you are classifying a guitar and it comes with a case or you're classifying a pair of monoculars and it comes with a case, the fitted container case, it gets classified with the item. Additionally, in 5B, if you're classifying packing material, and it's not reusable packing material that stripped away from the article and shipped back or reused in other scenarios, the packing material gets classified with the good that it encapsulates, right? And then in GRI6, the rule here is you have to apply GRI 1 through 5 at the heading and the subheading level. And so what that means is that you can't skip ahead in terms of determining your classification. So, going all the way back to the beginning, if you look at GRI 1, if you are weighing different classifications to be used or different headings to be used, you need to compare heading to heading and apply the most appropriate heading before you start looking at subheadings and then comparing subheadings within that heading. So, you can't compare a heading of one chapter to a subheading of another chapter for example. You need to pick a heating and then mix if that makes sense. So, that's a lot of information on how a product is classified. Let's go through one example and we'll have a poll question to talk through how everybody thinks this is classified. And I picked this item maybe about 4 or 5 years ago. I was at the pet shop with my dog, that's my dog is on the left. She's a West Island carrier. She's 11 years old. I've never been able to train her to do anything. That's the most still she's ever been when I've taken that picture of her. And I took you through a pet store, and I found this item. It's an item that dispenses food bags, but it also has a flashlight on it, right? And in the commercial descriptions, it shows, hey, it's got multiple uses. It dispenses poop bags. It holds the poop bags, but it also hasn't blast on it. And I thought this was a great example of something that maybe not, may not be straightforward in terms of how to classify because it's a couple of different things, right? It's a flashlight, it's a footbag dispenser and it comes with bags. Do you classify the bags with the dispenser or do you classify it separately? So, in reviewing this with our team, we came up with a couple of potential thoughts here. One was 8513, which is really looking at it and saying, "Hey, the essential character of this item is a flashlight, let's classify a flashlight or we thought about it is it really just an article of plastic as defined within the tariff, and it really core function is that poop bag dispenser". So, these are the 2 that we've come down with. We've hosted a poll question. So, I want to see what everybody thinks. Is it a flashlight or is it a poop bag dispenser? I'm going to pause and get some water while we fill that out. Survey says pretty close split. Wow, I don't know even can see this, so I'll track it over. Just under half of us as 8513, just over half of us said 3926. That's exactly the result that I will get out of this exercise because it really demonstrates that this is not as straightforward as it all looks, right? There is no EO nominee classification for a poop bag dispenser. There is one for a flashlight if we consider it to be a capacity, but it's not an EO nominee classification. So, here's what we came up with, right? So, we decided the correct answer on this $3,926,909,985, which is an article of plastic. And the general interpretation that we used was 3B. And remember, 3B is when you've got multiple headings in play, you need to use the heading that most accurately describes the product. And the reason that we got to this is that we decided that the flashlight was really more of an accessory function, but the core function of the article was a poop bag dispenser. And as an example for that, if, for example, the Flashlight broke or you had a battery go out on it, the essential function of the item, which is to carry those poop bags can still be facilitated. There are also several rulings that are in place within CBP Cross that can support this. and also support the fact that even if the poop bags come with the item, the bags would be classified within the item. So again, in reviewing this, one would think it would be a simple thing in a pet store, we had to go through a fairly significant review process to look at and determine based on fairly complicated general rules for adaptation and a basis of ruling in terms of how it could be classified. Now, that's great information for the importer because remember, the flashlight was a much higher duty rate, right? So, that's really good information. I talked a little bit at the beginning of the presentation about binding rulings, something really important to remember as part of the binding ruling process. And any of you that are responsible for classification in your own company, know that binding rulings can be very exhausted in their interpretive analysis when determined by U.S. customs. But they also are a double-edged sword, right? It's almost kind of like being an interrogator in a courtroom, you don't necessarily want to ask the question unless you're reasonably sure that you know what the answer is. Because when binding rulings are requested by importers, it becomes a formal opinion or a decision on the classification of the merchandise, right? So, what our approach is on these binding rules that we do them or for advising a customer on how to do the business, you have to file what's called an Advocacy Binding Ruling. And the Advocacy Binding Ruling is basically saying to customs saying, "Hey, we think the classification is this based on these specific legal rationales and past decisions or determinations, please let us know if you disagree or if you can confirm our classification," right? Lead customs to water in that respect in order to make sure that we get the classification that you want because if you don't, and for example, in the previous example, customs come back and says, "Hey, actually, the classification of this should really be a flashlight for this particular item". Then you're stuck with paying almost twice the amount of duty on the imported product. If you don't have a binding ruling, but you've got very clear justification nodes within your written record of your trade compliance administration are showing customs. Well, hey, we classified this based on this, based on this general interpretation based on this common use and based on these previous legal or legal determinations by U.S. Customs, you can at least show that you're providing -- you're demonstrating reasonable care in making your decisions. And as such, and as a part of that reasonable care process, you're still going to be potentially on the hook for additional duties, but that goes a long way in mitigating fines or penalties if customs beliefs don't necessarily have a robust process. All of that being said, binding rulings are necessary to rule the trade when you've got items that are fairly complicated or may have multiple classifications, and the value or the delta in different duty rates is such that you -- it's for your benefit to lock in a classification of what it is from a risk mitigation perspective. Some other really common classification issues that we see, we, as a service provider do classification as our bread and butter, and it's something that is probably the largest thing that we do. We classify in every vertical. We classify high volumes every month. The challenge always with rendering classifications is making sure you've got good product information supporting the item. And sometimes, there aren't those blueprints or drawings or specifications available in order to make those classification decisions. And you have to default to invoice descriptions or commercial descriptions that are available at a cursory level for the product. That's also really important for your customs broker because as they are reviewing invoices and filing entries, while they aren't necessarily going to be in a position to say, "Hey, you classify this poop bag dispenser is a flashlight, it should be an article of plastic. If they see it classified as a birthday cake, we have a duty to care to read their hand and say, "Hey, we need to take a look at this and see if this is right or incorrect". So, to that point, it's really important to make sure that classic invoice descriptions are clear. They're not simply SKUs or product codes or unique nomenclature items that are used internally. The other thing that I would say, too, is that it's really important to consider our vernacular in terms of assigning those invoice descriptions. So, example is a seat part of the valve or a part of the chair, our chips and wafers, potatoes and cookies or semiconductors. I lived in the United Kingdom for 5 years. The term pants means something very different there than it does here. So, those are some comments samples where you want to look at terms that you're using to make sure they're clear from an interpretation perspective, not just in your importation process in the U.S., but if you've got global responsibilities, looking at how those are applied there as well. Another very common issue around classification is looking at parts of provisions. So, in every heading, there are what we consider to be basket provisions, provisions that are the other provisions where something is not specifically mentioned or there might be a provision that says this item is part of an aircraft or part an automobile or a part of whatever, right? Those parts of classifications are tricky because it's very easy as an importer to take a shortcut and say, well, I'm importing low rings or flanges or bolts and screws or washers or other items that might otherwise be directly classified and I said, "Well, but I'm using these to make an airplane so they're parts of aircraft, right? It's actually not the case. In defining the parts of provisions within a tariff schedule, those parts of provisions are really designed for articles that can only be incorporated and used in the item that they qualify. So, an aircraft or an automobile. If you have common terms of parts, both those terms have multiple potential uses other than in the in that you are constructing, they need to be classified within their constituent material or directly classified in terms of where they're listed, right? All right. So, that brings us to the conclusion of the presentation portion of this. We are open for questions. If you'd like to submit or facilitate questions in the chat box, please feel free to do so. Before we get to questions, I did, and I don't know if, Kevin, maybe you want to do this, but we'll pause on the slide here so everybody can read and get QR codes for upcoming events on the expeditors side for items that are hosted by the Northeast region as well as other trade publications. I would say, in addition to an expeditors blog that covers a variety of different topics, there is also a Tradewin blog that is available on our website, trade.net, where we commonly publish trade updates, but also best practices to the trade from a trade compliance management perspective. So, with that, we're open to and available for questions.

Thanks, Matt. As you said, you can use the QR code or in the e-mail that you received, there'll be some follow-up items or registration items that you can click on there as well. I think there is one question in the box. Yes. So, when you receive the survey, you'll receive a copy of the presentation as well. All right. Any other questions? I don't know if I see anything left. Well, I'd tell you, I really appreciate everybody joining us today. We hope this session was informative, and we look forward to your feedback. A couple more questions, rules for classing part of parts of higher assembly.

So, when you refer to a higher assembly, so we're thinking about, let's say, cost in a pushed in that goes into an engine as an example, I think that's what we're referring to as a higher assembly item, but that might go into a car. We really need to look at the specific terms of the headings and subheadings and make sure that we look at those appropriately. And the same rules on parts of Apply, right? If there is a specific classification that speaks to a classification determination that more correctly defines a product than a part of because the part isn't directly as -- then it needs to be classified as that specific list of product item.

Another one here. Is the HTS provided by the manufacturer at least to the first 6, correct and safe to use?

Well, I'll go on a tangent for that and talk a little bit about what we're seeing in the industry in terms of how we do this. So, it depends, right? So if you're using the 6 digit as a guided guide, but you're doing an independent analysis and determination of the full 10-digit classification and your understanding and applying those general rules of interpretation to review and confirm that those 6 digits that the manufacturer provided not only are correct from a perspective of the way the tariffs scales, but it's also correct in terms of the way that the U.S. government interprets that 6-digit classification. You can incorporate that rationale into your decision-making, but you still need to make your own independent decision of the 10-digit classification. I'll speak briefly about a really important ruling that was lodged and determined by U.S. Customs last year, and it was called the Hampton ruling. And effectively, what the Hampton ruling said was that in scenarios where a classification is provided by a party other than the importer of record, that provider needs to be licensed in terms of having a corporate governance of licensed customs broker in order to provide those determinations. So, even scenarios where you've got suppliers in the supply chain that are providing classifications because they are not the importer or a licensed party, you can't rely on those classifications to facilitate your own classification program. Another really notable change in regulations that occurred in October of last year that was part of new broker regulations around what we call it 19 CFR 111 or the regulatory terms that garner broker relations, is that they really define and confirm the classifying is considered to be customs business, and it defines customs business as having to happen within the customs territory of the United States. So, just as you can't key brokerage entries outside of the United States or facilitation into the U.S., those classification determinations went not made by the importer, need to be made by a licensed party in the United States.

All right. So, 2 more questions. If customs suggest that commodity code that should be used will the result of the binding ruling always fall as that code?

Well, this is a really good question. I think the thing that I always try to say to companies when they're looking at administering their trade compliance program is that customs is a human organization just like companies are a human organization. And they're subject to interpretive differences as well as procedural differences in the way that they make classification decisions. I would say any classification guidance that you receive from customs is valuable, but it should be taken with the grain of salt even especially in your own independent review, applying the GRIs, chapter nodes, section notes, explanatory notes, and everything else you come up with a different decision. It probably may be a good idea to go for a ruling in that scenario. The people that are going to review the ruling are different than the people that potentially would be providing informal guidance for customs.

All right. So, there was a follow-up question on the last one that you had answered about the vendor classifying out to 6 digits if they should use it or not. So, the follow-up is if you disagree with the manufacturer, can you request your own customers binding with CBP? And if so, does their ruling also apply to the manufacturer?

Well, I think it depends on the scenario of who's filing the entry and who has responsibility for the accuracy of the entry. If you're the importer of record on the 7501 under the Customers Modernization Act, you've got the responsibility to make sure the classification is right and to determine reasonable care on that item. So, even if the manufacturer says one code, it is to your benefit to independently analyze and determine the classification for your own internal compliance program. There can be, what I would say, are difficult conversations, not on the classification front, but on the free trade agreement front, if you get a difference in interpretation in classification between your -- the product coming into the U.S. and what the manufacturer wants to use, but really more specifically around maybe what are those qualification rules on using the FDA at Robey.

Okay. And last one, if you have more than 10,000 items, what is the best way to classify all of them?

Time and a big old cup of coffee. No, I think usually when you look at database reviews for classification and being sanitized, the important thing is to look and say, in, for example, you got a 10,000 item product master, is, are there really 10,000 active parts? Or are there inactive parts as the product mixture that can be classified on a more ad hoc basis? So, can you whittle it down and rule it down in that sense? If you get to active parts only, the best way to attack that classification program is to group products or sort them by product description. So, you have light products together. That doesn't mean you can do a group analysis of classification. You have to do an independent analysis by product but it helps your throughput in terms of obtaining and gathering information and data to render the classification.

All right. So, I was going to -- I said that was the last one, but I do have one more. What do I have to do if I determine that I've been using the wrong classification?

It's going to depend on for how long and at what scale. So, there are a few different mechanisms of fixing information with U.S. Customs. If you've got some piecemeal classification changes that they've happened within the last 6 to 9 months, you're within the post-on re-correction window with U.S. Customs prior to the entries liquidating. And so, you can work with your broker to lodge those PSCs to fix the classification. If you're after the entry is liquidated and you're within the protest period, which is 180 days after liquidation, if you do a refund or 90 days after liquidation, if you own money, you can file a protest on the changes. If you got kind of an end mass issue and that n-mass issue covers more than I would say a year in 3 months or your statutory period of up to 5 years, your best option is to file what's called prior disclosure with U.S. Customs. Prior disclosures are a mechanism whereby you can let customs know formally that you need to amend entries through that prior disclosure provision, and they can't levy fines and penalties against you while you are fixing that prior disclosure in terms of doing it. Prior disclosures are, if you've got an n-mass issue that covers multiple years, probably the easiest way to do that. And there's really no shame in doing it. They're codified in the regulations. Customs expects even the most compliant companies every once in a while to discover an issue. So, those prior disclosures would be welcomed if there's a change that needs to be made.

All right. Well, as I always say, it's never over, right? But we have 4 more minutes left. Matt, you have time for one more? Or...

Yes, ask the one about the Australian customs...

Okay. So, we had a situation where U.S. customs and Australian capital came up with totally different classification and different chapters for the same part. Considering classification supposed to be universal to 6-digit number, how does one resolve this situation? Both were binding rulings by the U.S. and AU customs.

Okay. So, I had a scenario in my career, maybe 5 years ago when I was part of our European team, where we used a U.S. ruling as a justification to get an EU BTI, which is the EU equivalent of a binding ruling. And the governing body in the dismissed the U.S. ruling because it's out of the jurisdiction. So, yes, they're supposed to be harmonized at 6 digits, but you will see country-specific differences in interpretation and disagreement on those scenarios because you've got an independent ruling in each jurisdiction and those independent rulings speak to a different classification. In my opinion, unless you've got an appropriate appeal procedure in one of the other jurisdictions, you're kind of stuck with those classification decisions that they've made.

Okay. Well, Matt, thank you very much for taking the time out today to present for Expeditors and Tradewin. We hope that this session was informative, and we look forward to your feedback. Keep an eye out for the e-mail with the link for the review, if you will, and we hope to see you in other webinars. Thank you very much, everyone.