How Tariffs Work and Why Accurate Product Classification Matters

In 2024, the United States imported roughly $3.3 trillion worth of goods. That number alone shows how critical tariff and classification decisions are to the economy. Every single shipment crossing the border carries a tariff obligation determined by one factor: its product classification code. Get that code wrong, and companies face underpaid duties, enforcement actions, clearance delays, and penalties that can run into millions. Get it right, and goods flow smoothly, costs stay predictable, and compliance risk drops.

This guide explains how tariffs work, why accurate Harmonized Tariff Schedule (HTS) classification matters, the most common pitfalls importers face, and the tools that help companies classify products correctly the first time.

What Is a Tariff and How Does It Work?

A tariff is a tax imposed by a government on goods imported into the country. The United States collects tariffs at the border through US Customs and Border Protection (CBP). The revenue supports federal operations, while tariffs also serve to protect domestic industries from lower-priced foreign competition.

Tariffs come in two main forms: ad valorem and specific. 

An ad valorem tariff is expressed as a percentage of the product's customs value. For example, a 5% ad valorem duty on a $1,000 smartphone means the importer pays $50 in duty. A specific tariff, by contrast, is a fixed dollar amount per unit of the imported good, such as $2 per kilogram of sugar, regardless of the product's market price.

The difference between a 5% and a 25% tariff can dramatically alter landed costs and profit margins. Consider a shipment of 1,000 upholstered wooden chairs, each valued at $200, for a total customs value of $200,000. At a 5% ad valorem rate, the importer owes $10,000 in duty. At a 25% rate, the tariff recently applied to certain timber furniture under Section 232, starting October 14, 2025, the duty bill jumps to $50,000. That $40,000 difference directly impacts pricing, competitiveness, and whether the importer can profitably sell the product in the U.S. market.

Tariff rates are published in the Harmonized Tariff Schedule of the United States (HTSUS), a reference document maintained by the US International Trade Commission (USITC). It lists thousands of product categories and their corresponding duty rates. Rates change frequently. The USITC released HTS Revision 22 in September 2025, reflecting modifications to tariff classifications and rates. Importers must track these updates to remain compliant.

Types of Tariffs and Their Impact on Trade

US importers encounter several tariff structures, each with distinct implications for pricing and compliance. Ad valorem tariffs are the most common worldwide. They're expressed as a percentage of the goods' customs value. They scale with price changes. As the value of imported goods rises or falls, the duty paid rises or falls proportionally, maintaining consistent protection for domestic producers.

Specific tariffs charge a fixed dollar amount per unit, per kilogram, per liter, or per item. They are simple to administer and don't require customs valuation, but they can disproportionately affect low-value goods. They also lose effectiveness during inflation unless periodically adjusted.

Mixed or compound tariffs combine both methods. They apply a percentage of value plus a fixed per-unit charge. For example, a compound tariff might be "5% ad valorem plus $1 per unit." This provides layered protection but is more complex to calculate and appeal.

Tariff-rate quotas (TRQs) allow a lower duty rate up to a specified import volume. Once the quota is exceeded, a higher rate applies. TRQs create forecasting challenges and administrative burdens. Importers must monitor quota fill rates and timing to secure the lower rate.

Beyond these forms, tariffs are also categorized by trading relationship. Most Favored Nation (MFN) tariffs are the baseline rates applied to imports from WTO member countries with whom the U.S. has normal trade relations. 

Understanding which tariff type applies to a given product is essential, but that determination hinges entirely on accurate product classification.

How Accurate Product Classification Affects Tariff Calculation

Product classification is the process of assigning the correct HTS code, a numeric identifier up to 10 digits long, to every imported item. The Harmonized System (HS) is a global product nomenclature developed by the World Customs Organization. The first six digits are standardized internationally. Countries add digits to create national schedules like the U.S. HTSUS. Each HTS code corresponds to a specific duty rate. That rate can range from zero to over 25%, depending on the product and country of origin.

Misclassification carries serious consequences. If an importer assigns an incorrect code that results in underpayment of duties, CBP can issue a demand for the shortfall plus interest and penalties. In February 2025 alone, CBP completed 28 audits uncovering $2.9 million in unpaid duties from improper classification. Including prior-year violations, CBP collected more than $74.5 million in total.

Violations are categorized under 19 U.S.C. § 1592 as negligence (failure to exercise reasonable care), gross negligence (reckless disregard), or fraud (knowingly false information). Penalties escalate accordingly. Beyond monetary fines, repeat offenders risk losing Authorized Economic Operator (AEO) status, facing increased inspections and clearance delays, and suffering reputational damage that can affect customer and partner relationships.

On the flip side, overpayment due to an overly conservative or incorrect classification means importers pay more duty than legally required. This erodes profit margins unnecessarily. Accurate classification also determines exposure to anti-dumping (AD) and countervailing duties (CVD), which can add significant costs to specific products from certain countries.

CBP places the burden of "reasonable care" on the importer. Companies must document their classification methodology, consult authoritative sources like the USITC HTS database and CBP rulings, and, when necessary, seek binding rulings or expert guidance to defend their classifications during audits.

Common Challenges in Product Classification

Even experienced importers encounter classification pitfalls. Ambiguous product descriptions are a leading cause of error. If internal product catalogs use vague marketing terms rather than technical specifications, customs brokers and automated systems struggle to map items to the correct HTS code.

Multi-component goods present interpretive challenges. The HTS uses the "General Rules of Interpretation" (GRI) to determine which component imparts the product's "essential character." For example, a furniture piece with both wood and metal may fall under different chapters depending on which material predominates. Differing interpretations can lead to disputes.

Changing technology means product attributes evolve faster than tariff schedules. A device that functions as a smartphone, camera, and computer may straddle multiple HTS headings. Periodic HTS updates attempt to address new product categories, but gaps and ambiguities remain.

Language and translation issues complicate classification when product documentation originates overseas in non-English languages. Nuances in material composition or manufacturing process can be lost in translation. Finally, human error remains a persistent risk in manual workflows. Transposing digits, copying outdated codes, or failing to update classifications after product design changes all contribute to mistakes.

Tools and Technology to Ensure Accurate Product Classification

To manage classification at scale, importers increasingly turn to technology. Manual broker review remains the gold standard for complex, high-value, or novel products where interpretive judgment and regulatory expertise are critical. Licensed customs brokers analyze product specifications, apply GRI rules, and issue defensible classifications backed by CBP precedent. The trade-off is speed and scalability. Manual review can take days per SKU and becomes a bottleneck when catalogs contain thousands of items.

Rule-based automation systems encode HTS decision trees. If a product matches certain keywords or attributes, the system assigns a pre-mapped code. Rule-based tools are fast and work well for high-volume, predictable SKUs like standard electronics or apparel. However, they struggle with edge cases, new products, or ambiguous descriptions that fall outside the programmed rules.

AI and machine learning (ML) classification platforms analyze product data using natural language processing and adaptive matching algorithms to suggest HTS codes. These systems learn from databases of prior classifications. Avalara's platform, for example, draws on over 30 million classifications and improves accuracy over time as it processes more data. AI tools can handle unstructured product descriptions, identify key attributes automatically, and scale to classify thousands of SKUs in minutes. Leading solutions offer confidence scores, flag low-confidence classifications for human review, and integrate with enterprise resource planning (ERP) and customs clearance systems to create audit trails.

For teams moving from spot checks to scalable classification, Gaia Dynamics provides enterprise-grade classification automation, HTS mapping, and audit trails that integrate with ERPs and customs clearance workflows. The platform combines AI-driven product attribute extraction with rule-based validation. This enables compliance teams to classify large catalogs quickly while maintaining the documentation and confidence scores required for CBP audits. Learn how Gaia Dynamics can reduce duty risk and speed clearance here.

Conclusion

Accurate product classification is both a cost-control lever and a legal obligation. With U.S. import volumes topping $3.3 trillion annually and tariff rates shifting frequently, recent examples include Section 232 timber tariffs effective October 14, 2025, and ongoing reciprocal-tariff adjustments; importers cannot afford classification errors.

The path forward combines investment in technology, whether rule-based systems for standardized goods or AI platforms for large and diverse catalogs, with continued reliance on qualified customs brokers for interpretive judgment and regulatory guidance. Companies that establish robust classification processes, document their methodology, and monitor HTS updates will minimize duty overpayment, avoid penalties, and maintain the predictable clearance timelines that keep supply chains running smoothly.