Tariff Engineering, What It Is, and How It Can Help Your Import Business Grow

Tariff engineering is the process of designing or modifying products to maximize duty savings. The goal is to minimize the customs duties paid on imports, while still meeting all applicable import regulations.

If you're in the import business, you know that tariffs can be challenging. You may be able to get around some tariffs by using a process called tariff engineering. This is the process of designing your products in a way that minimizes the impact of tariffs. There are a few ways to do this. One is to choose materials that are not subject to tariffs. Another is to design your products so that they can be assembled in a country that has lower tariffs. Tariff engineering can be a complex process, but it can be well worth the effort if it helps you avoid costly tariffs. If you're not sure where to start, there are many resources available to help you learn more about this process. With a little research, you can find the information you need to make your import business more efficient and profitable.

Shippers, business owners, and dependent industries are all watching closely as the United States continues to initiate tense international demands from long-time trading partners like China and Mexico. But as some shippers look for sourcing alternatives to trade disputes, other industries and companies are staying two steps ahead of administrative hurdles by adapting products to affected tariffs, otherwise known as “tariff engineering.”

Tariff engineering refers to the process of altering products in such a way that duty benefits, such as a lower rate, applies at the time of importation.

Unlike tariff evasion, tariff engineering places emphasis of understanding duty definition at the time of design and production to legally fit a lower duty.  The process considers the fiber content, materials used, and construction of the product before the goods are manufactured.

But shippers must be very careful, this technique should never be used with the intent of removing the alteration upon import – this is considered illegal as “artifice, disguise, and fictional product” and may result in penalties & fines.

What are some of the most well-known examples of tariff engineering still used today?

SHOES

Nike-owned Converse sneakers created a perfect example of tariff engineering when they designed in a layer of felt to cover more than 50% of the sole of their shoes.  Because “classification of footwear is essentially cased upon the composition of the outer soles and uppers” the fuzzy addition was incorporated to take advantage of the loophole.

Why? Shoe imports into the United States can fetch up to 48%, while slippers hold a much more beneficial duty rate of 6%.

SECRET TINY POCKETS

Apparel manufacturers know all too well the cost certain products can have when imported from specific countries.  For example, Women’s or girls’ blouses, shirts and shirt-blouses of man-made fibers can have a duty as high as 26.9% (of the value of the goods) but can be classified under a lower duty rate if they have a pocket below the waist or a ribbed waistband

MARVELOUS DOLLS

Tariff engineering, like in the garment example, can be levied tactically by organizations who can afford to do battle to achieve savings.

Marvel comic fans, for example, enjoy lower duty rates on their favorite superheroes and villains after the Company’s 1995 battle to have their imported action figures reclassified from “dolls” that have a 12% duty to “toys” that receive a more modest 6.8 percent.

The team argued and successfully managed to win the lower duty arguing that the action figures could not be classified as dolls because they were not representative of human beings.

You see, under Heading 9502 of the HTSUS, “Dolls representing only human beings and parts and accessories thereof” and “in order not to be classified as dolls, figures representing…other creatures, must possess appendages and features which immediately, at first glance, identify them as non-human.”

Tariffs are a huge cost to importers and especially in times of trade wars and economic problems, tariff rates are always fluctuating.  But tariffs have been around for decades, and for as long as they’ve been in place, companies have tried to find ways to minimize what they owe.  Tariff rates can change significantly based on a small design detail, and some companies have spent the time figuring out how to design apparel and products in accordance with American tariff policy.

Tariff Engineering is a study or a legal process on how companies can make small changes in their design processes in order to reclassify their final product under a more favorable duty category (ie they’ll pay less in duties) at the time of importation.

It’s legal as long as the changes are not removed after importation. You’d be surprised at how the slightest and smallest details can make such a huge impact!

FASHION TARIFF ENGINEERING

Nike owns the Converse brand and it is undoubtedly one of the most famous sports brands in the world. Converse is one of the companies who executed tariff engineering perfectly. They designed their shoes in a way that they put layers of felt on the sole, covering more than 50%, in order to reclassify their product as slippers rather than shoes.

With this tactic, they were able to generate duty savings because importation duty rates of shoes to the United States can be as high as 37.5% while the duty rates for slippers upon importation is only 3%. That’s a huge savings just by adding that extra layer of felt on the soles.

Columbia Sportswear has been around for decades and is one of the biggest apparel manufacturers in the world.  Columbia Sportswear is an expert when it comes to tariff engineering. Since most of Columbia’s items are made abroad they carefully align their design process with tariff codes in order to reduce costs.  To accomplish this, their design team collaborates with trade experts.

Next time you are in an REI, Kohl’s or other store that sells Columbia apparel, their women’s shirts. You will see that there are tiny pockets just below the waistline. These tiny pockets are functional (they are big enough to hold a key or a credit card), but they serve a much greater purpose:  reducing the tariff rate.  American Tariff policy states that tariff rates for imported women’s blouses made from man-made fibers can be as high as 26.9% but if there are pockets below the waist they are excluded from this and the tariff rate can go as low as 16%.

TOYS

Another interesting example of tariff engineering is in the case of Marvel’s Action Figures. In 1995, the team at Marvel fought to reclassify their action figures from dolls to toys because their action figures are non-human. According to the American Tariff Policy, dolls are classified as a representation of human beings. Marvel successfully won their case by successfully arguing that their action figures did not represent human beings. This was very significant and was a huge win for Marvel and their customers because the tariff rates of dolls are at 12% while toys enjoy a tariff rate of only 6.8%.

Bottom line it is worth every penny to know that your goods are being imported under the correct tariff.  And it could potentially save you lots of money if you could find a legal and economical way to re-classify or re-design your product to fit within a lower tariff code.  It’s remarkable how specific the tariff codes are and what may seem a trivial design element may have a huge impact on the final cost of the product.  Gallagher can’t help with re-designing your products, but we can make sure your goods are classified correctly.  If you have any questions, Gallagher is always ready to help.

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

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.

Draft:  Intro

If you're in the import business, you know that tariffs can be a challenge. You may be able to get around some tariffs by using a process called tariff engineering. This is the process of designing your products in a way that minimizes the impact of tariffs. There are a few ways to do this. One is to choose materials that are not subject to tariffs. Another is to design your products so that they can be assembled in a country that has lower tariffs. Tariff engineering can be a complex process, but it can be well worth the effort if it helps you avoid costly tariffs. If you're not sure where to start, there are many resources available to help you learn more about this process.

Why should you do it?

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. With a little research, you can find the information you need to make your import business more efficient and more profitable.

• saves you money   What to consider?

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 change it completely 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.

Examples of Tariff Engineering on Big Brands: Nike owns the Converse brand, and it is undoubtedly one of the most famous sports brands in the world. Converse is one of the companies who executed tariff engineering perfectly. They designed their shoes in a way that they put layers of felt on the sole, covering more than 50%, in order to reclassify their product as slippers rather than shoes.

they were able to generate duty savings because importation duty rates of shoes to the United States can be as high as 37.5% while the duty rates for slippers upon importation is only 3%.

Columbia Sportswear is an expert when it comes to tariff engineering. Since most of Columbia’s items are made abroad, they carefully align their design process with tariff codes in order to reduce costs.  To accomplish this, their design team collaborates with trade experts.

Next time you are in an REI, Kohl’s or other store that sells Columbia apparel, their women’s shirts. You will see that there are tiny pockets just below the waistline. These tiny pockets are functional (they are big enough to hold a key or a credit card), but they serve a much greater purpose: reducing the tariff rate. American Tariff policy states that tariff rates for imported women’s blouses made from man-made fibers can be as high as 26.9% but if there are pockets below the waist, they are excluded from this, and the tariff rate can go as low as 16%.

Another interesting example of tariff engineering is in the case of Marvel’s Action Figures. In 1995, the team at Marvel fought to reclassify their action figures from dolls to toys because their action figures are non-human. According to the American Tariff Policy, dolls are classified as a representation of human beings. Marvel successfully won their case by successfully arguing that their action figures did not represent human beings. This was very significant and was a huge win for Marvel and their customers because the tariff rates of dolls are at 12% while toys enjoy a tariff rate of only 6.8%.

How to start

• 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

Conclusion

Bottom line it is worth every penny to know that your goods are being imported under the correct tariff.  And it could potentially save you lots of money if you could find a legal and economical way to re-classify or re-design your product to fit within a lower tariff code.  It’s remarkable how specific the tariff codes are and what may seem a trivial design element may have a huge impact on the final cost of the product.

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