Canada-U.S. Blog Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

What We Have is a Failure to Communicate: Computer Programmers Should Not be Expected to Know Customs and Trade Compliance

Posted in AMPs, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, GST/HST, Imports Restrictions, origin, Sales Taxes, tariff classification, Tax, valuation

This is a common problem – too common.  The people in the company responsible for customs and trade compliance do not work closely with the computer programmers as software is being developed — and mistakes are made.  The computer programmer does his or her job in preparing the code, but does not have any knowledge of customs and trade law and cannot incorporate customs and trade compliance into the software. Without effective communication (a download) of customs and trade compliance rules, the computer programmer cannot make sure that the rules are being implemented and the correct information is bring communicated to the customs authorities and that the proper paperwork is being developed.  When there are omissions or mistakes, this can lead to significant assessments of customs duties and the imposition of penalties.  The reputation of the company may be at risk.

Common Scenario: A company outside Canada (e.g., the United States, but could be any where) sells goods to Canada (either direct B-to-C electronic sales (e-sales or Internet sales) to customers or B-to-B sales to Canadian distributors or Canadian retailers or Canadian manufacturers).  The company outside Canada hires a computer programmer to develop a fantastic computer program to receive the orders, print shipping documents, send information to customs brokers/freight forwarders, record the sales in the financial reports, monitor inventory, etc.  However, no one in the legal department or compliance department or finance department communicates to the computer programmer the customs and trade rules applicable to the business (e.g., the customs rules relating to origin).

Common mistakes we have seen:

  • Computer programmers are not told that shipping a good from one country (e.g., the United States) does not mean that the good is considered to be originating in that country (e.g., the United States).  As a result, the computer programmer creates a program to issue NAFTA certifications of origin for all goods shipped from the a United States warehouse when goods in the warehouse were not actually manufactured in the United States.
  • Computer programmers are not told that different goods must be identified separately on customs documents and the computer program write code so that the company computer that sends information to the customs broker only provides the total invoice price.
  • The computer programmer is not informed that the company will be the importer of record and that delivery will take place in Canada.  The computer programmer does not know that Canada imposes sales sales and charges federal GST/HST at different rates and provincial sales tax in some provinces. Sales taxes are not included on the invoice.
  • The computer programmer is not informed that the company will be the importer of record and the computer programmer writes code to put the value of a complimentary item at $0 rather than the cost of goods.
  • Different computer programmers write the code for the invoice generating software and the software to communicate with the customs broker. The customs broker uses a different currency (e.g., USD) than the currency used on the invoice (CDN$).  The computer programmer does not consider that prices would be anything other than USD.
  • The computer programmer is not informed that certain goods require export permits before they can be shipped and code is not prepared to flag potentially problematic transactions or trigger the application for the export permit. The goods are shipped without an export permit.
  • The computer programmers is not informed that certain goods require import permits before they can be shipped to certain countries and the computer program does not flag potentially problematic transactions or trigger the application for the permit. The goods are shipped without the import permit.
  • The Computer programmer is not informed that the exporting country (e.g., Canada) has imposed economic sanctions on certain persons from certain countries or certain goods and the computer program does not flag potentially illegal transactions. The goods are shipped.
  • The computer programmer is not informed of the Incoterm that is being used and the financial accounting software books the transaction on the date of entry into the database and not when the goods are delivered to the customer.

If you have not conducted a customs or trade compliance audit of your software, you may want to take a moment to do so.  If you have not asked “what information is our customs broker receiving and is is accurate”, it is time to investigate. If you have not asked whether the information your company provides the customs broker is correct with respect to origin, valuation, tariff classification, currency, description of goods, quantity of goods, etc., it is time to compare the invoices that are generated against the appropriate customs documentation. If you have not asked whether the computer program flags certain problematic transactions that are placed by Internet customers, you might want to input a transaction that should be flagged and see what happens.  If you have not asked when electronic transactions are booked in your financial records, you might want to investigate further.

We have worked with many clients (and their computer programmers) to prepare computer programs that communicate the correct information.  We have worked with clients to ensure that the computer program continues to accurately communicate information – adjustments are made when the law changes.  This is not something that you “set it and forget it”.  Computer programs need to be tested just like any other internal recordkeeping.  It is important to conduct internal reviews and external reviews (e.g., with the assistance of your customs broker or freight forwarded) to ensure that what you think is accurate information is being received and processed as true, accurate and complete information (and does not raise audit flags).  You might be surprised to find that computers play “broken telephone”.  We rely so much on computers, but do not take the steps to make sure that there are no “glitches”.

If you require customs compliance assistance or assistance in determining origin of goods, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.