How to Audit Your Tariff Exposure

Your duty bill is now bigger than your freight bill

Two years ago, you spent weeks negotiating carrier contracts to save $200 per container. Customs duties were a 2-3% line item that Finance barely glanced at.

That math has completely flipped.

Andy, who runs cross-border logistics at the busiest Mexico-US border crossing after 35 years in the business, put it bluntly: "This used to be a 1% line item on your cost of goods sold. In the current environment, that's not the case."

Adam, a customs attorney with 35 years of experience, told me: "I've never seen higher duty rates in the United States than right now."

Here's what a typical $45,000 FOB container from China actually costs to land today:

Your duty bill is now 7.5x your freight spend. This isn't a procurement line item anymore. It's showing up in board meetings. Your CFO is asking questions you don't have great answers for yet.

And everyone's selling you something. Bonded warehouses. FTZs. Nearshoring to Mexico. Someone mentioned "first sale for export" last week.

But most companies aren't ready to evaluate any of those strategies. They're missing the foundation work.

Can you answer these questions right now?

• What's your actual landed cost per SKU?

• Which 20 SKUs are killing you on duties?

• If Customs showed up tomorrow, could you defend every HTS code?

If you can't answer those within 48 hours, you're not ready to evaluate any tariff strategy. You're just buying whatever sounds good in the pitch.

The 3 variables that determine your duty bill

Every tariff strategy you're being pitched—bonded warehouses, FTZs, nearshoring—is just optimizing one of three variables.

Adam, a customs attorney, put it simply: "It's your HTS classification, it's your country of origin, and it's the value you declared to U.S. customs. Those three things are going to drive your landed duty paid cost."

That's it. If you don't know your baseline on each, you can't evaluate which strategy makes sense for your situation.

Variable 1: HTS Classification

This is your 10-digit Harmonized Tariff Schedule code. It determines your base duty rate. Tom from Passport told me something surprising: "Brands just leave it to the broker." The forwarder assigns a code, you accept it, nobody verifies if it's optimal or even defensible.

You probably have hundreds or thousands of SKUs. Each has an HTS code that someone set years ago. Nobody's reviewed them since. No documentation for why those codes were chosen.

Aaron, a supply chain consultant, shared an example: A jewelry brand added their logo to products and dropped from 15% to 2% tariff. Massive annual savings from one classification change.

The catch: you can't just change codes without documentation. You need to justify it (product composition, primary use case, manufacturing process) and document all of it in case Customs asks. Systemic misclassification can mean millions in back duties plus penalties.

Variable 2: Country of Origin 

This is NOT "where it shipped from." It's where substantial transformation occurred.

Most companies have complex supply chains: components from multiple countries, assembly in others. Trans-shipping is under heavy scrutiny right now. China to Vietnam with minimal transformation and new labels. Customs is using data analytics to find patterns.

Aaron mentioned something striking: "DOJ named customs fraud as #2 priority after healthcare fraud. They created hotlines for whistleblowers. 10% of duties recovered." Your warehouse worker, your freight forwarder, your customs broker: they all know how your goods really move. There's now a financial incentive to report it.

Stephen, who sources factories globally for brands, gave me reality: "30-40% of clients, China still remains the only cost-effective option." You need to know if you're in that group before relocating suppliers.

Variable 3: Declared Value

This is what you tell Customs the goods are worth. Most companies buy through multiple channels: direct from factory, through trading companies, through related-party transactions. Each has different valuation rules.

There's real opportunity here. Tom mentioned first sale for export can deliver "20-40% savings" if you can properly document multi-tier transactions.

But Adam frames the stakes clearly: "When you import goods to the United States, your entry summary is like a tax declaration. It's the same thing as filing something with the IRS." Would you file corporate taxes without supporting documentation?

"Please send entry summaries for all imports [last 12 months], CSV format. Include: entry number, HTS code, declared value, country of origin, duty paid, our item number, supplier name."

Most brokers can pull this in 24-48 hours. If they can't, that's a red flag about your broker relationship.

But first, a quick sanity check: do you even know if you're the importer of record? Parker, who spent ten years building a clothing brand before founding a duty optimization company, shared a useful tip: "Go to importyeti.com and type in your company name. See if there's a history of product coming in over the past couple of years under that name. If there is, you're likely the importer of record. If there's no history, you're likely not." This matters because if your 3PL or factory is the importer of record, the optimization playbook changes significantly.

Once you confirm you're the importer of record, pull your ERP data for the same period (SKU, supplier, factory location, FOB cost, freight cost, units). Reconcile the two datasets. Match customs entries to purchase orders.

Red flags to watch for:

• Same SKU with multiple HTS codes across different entries

• Declared value significantly different from FOB cost

• China origin entries that increased after tariff changes

• Entries you can't match to POs or suppliers at all

Step 2: Calculate your true landed cost (Week 2)

Build a landed cost model for every SKU you import. Not just your top 20. All of them. Because your "top 20%" could be 200-400 SKUs representing 80% of duty spend.

The formula for each SKU:

• Customs value = FOB + freight + insurance

• Base duty = HTS-specific rate x customs value

• Section 301 = 25% x customs value (if China origin)

• Section 232 = 25% x aluminum/steel portion x customs value

• MPF = 0.3464% x customs value (min $31.67, max $614.35 per entry)

• HMF = 0.125% x customs value (ocean shipments only)

Your ERP probably uses a blended landed cost factor ("add 15% to FOB for all imports"). That worked when duties were 2-3%. It's wildly wrong now.

Adam from Parabola built tools specifically for this: "We have a template where you can model out different countries. Upload your product catalog with SKUs and HTS codes, and compare what your tariff exposure would look like."

Step 3: Map your supply chain beyond your direct supplier (Week 3)

For your top 100 SKUs by duty spend, you need to go deeper than just knowing who you buy from.

Tier 1 (your direct supplier): Legal entity name and location, actual factory location(s), whether they're manufacturer or trading company, your relationship type, contract terms.

Tier 2 (their suppliers): Where they source raw materials and components, what percentage of product value comes from each source country, whether any components are subject to Section 232 tariffs.

Product development assets: Do you own tech packs, 3D files, engineering drawings? Who owns tooling and molds? Could you move production to a different factory with your current documentation?

Why does this matter? Different strategies require different levels of supply chain transparency:

Stephen's observation: "Brands that don't know how the soup is made. They just place an order and get what they have. That's asking a lot from a different factory."

Political note: Procurement probably owns supplier relationships. But they might not have this detail documented. Asking suppliers for Tier 2 cost breakdowns is sensitive because you're asking them to reveal their margins. Frame it as: "We need this to qualify for preferential tariff treatment" not "We're trying to figure out how much margin you're making."

Step 4: Audit your documentation (Week 4)

This is your "are we ready for a Customs audit?" check. Pull a sample of recent entries (last 50-100) and review:

Commercial invoices: Are product descriptions detailed and accurate? Do unit prices match your POs? Is country of origin correct?

Packing lists: Do they match commercial invoices exactly? Are unit counts correct?

Entry documentation: Do you have copies of all entry summaries? Can you match them to specific shipments and POs?

Supporting documentation: Transfer pricing docs for related-party transactions? Certificates of origin for USMCA claims? Documentation for any Section 301 exclusions or first sale claims?

The standard: Can you produce every document for every entry from the last 5 years, organized and audit-ready, in under 2 weeks?

If you spot issues, you have options: voluntary disclosure to Customs (can mitigate penalties), binding ruling request (gets you on solid ground going forward), or entry correction. But you need Legal involved to assess materiality and disclosure obligations.

Step 5: Build scenario models (Week 5-6)

Now that you have your baseline data, build a financial model that answers the big questions: What if China tariffs hit 200%? What if Vietnam/Cambodia/Thailand all increase to 40%? What if we relocate 30% of production to Mexico? What if we implement first sale for export on our 50 highest-value SKUs? At what tariff rate does each product category become unprofitable?

Each scenario needs to account for different tariff rates by country and product type, different freight costs (nearshoring might reduce freight but increase FOB), different lead times (which affects inventory carrying cost), different MOQs (new suppliers often require higher minimums), and different payment terms.

Andy's perspective: "Unfortunately it's highly unpredictable. Nobody knows a week from now those tariffs could go away. But hopefully in that instance, it just adds to your bottom line."

You're not trying to predict the future. You're understanding your exposure and options at different tariff levels. Update this model weekly.

The board conversation you actually need to have: "If tariffs stay at current levels, our annual duty bill is $12M. If China goes to 200%, it's $18M. If we execute our nearshoring plan, we can get back to $9M, but it requires $2M upfront investment and 12 months to execute. Here are the decision triggers."

Step 6: Calculate your financial buffer (Week 7)

Calculate 6 months of tariff exposure at current rates, then set aside 25-50% as emergency reserves.

Example: If you're importing $50M/year with 30% effective duty rate:

• Annual duty exposure: $15M

• 6 months: $7.5M

• Suggested buffer: $1.9M - $3.75M

That's real money. You need CFO buy-in.

When tariffs increased suddenly in 2024, some companies had goods in transit. They shipped expecting one tariff rate, goods arrived at a much higher rate. Without cash buffer, that creates an immediate crisis.

Adam emphasized this: "Put some money in an account. If you get a hundred thousand dollar bill, it won't kill your business. You don't want to be in a position where you don't have liquidity to deal with a customs issue."

How to frame this to Finance: "This is risk management, not cost. Best case: it earns 4-5% in a money market fund. Worst case: we avoid a liquidity crisis that disrupts operations."

Step 7: Identify what expertise you need (Week 8)

Be honest about what you can handle in-house vs. what needs experts.

You can probably DIY: Basic HTS code research using CBP's CROSS database (it's free), landed cost calculations, scenario planning spreadsheets.

You probably need customs broker upgrade for: Comprehensive HTS code review across your entire product catalog ($15K-40K typically), origin determination analysis, entry review and cleanup for past issues, binding ruling requests.

You definitely need a trade attorney for: First sale for export implementation and structure, USMCA qualification analysis, related-party transaction review, voluntary disclosure, Customs audit defense.

Cost reality: $500-750/hour for experienced trade attorneys. Figure $50K-150K for complex projects like first sale implementation.

ROI perspective: If first sale for export saves 20% on $50M of imports, that's $10M annually. Spending $100K on legal fees to implement it correctly is a 100:1 ROI in year one. If misclassification exposes you to $5M in back duties, spending $40K on a broker review to fix it proactively is a 125:1 ROI.

Tom's perspective: "Classification is something that the customs broker exam focuses heavily on because it is complex." Even customs brokers need specialized training for this. You're not going to DIY complex compliance just to save professional fees.

One more consideration: Your current customs broker might say "we can handle all of this." Maybe they can. But maybe they're the ones who set up your current classification approach that now has issues. You might need an independent review. Frame it as "second opinion for complex structures" not "we don't trust you."

What comes next: Evaluating your options

Once you've completed the baseline work, you can evaluate strategies with real data behind your decisions.

Option 1: Optimize in place

Start here if your HTS classification is defensible but potentially sub-optimal, you're declaring full FOB value when you could use first sale, or you're paying Section 232 tariffs on entire products when you could split by material composition.

Daniel from Dimerco explains material splitting: "If you're using 10% aluminum, you pay the 50% tariff on only that 10%, not the whole product." Timeline: 2-4 months. Savings potential: 5-20%. Risk level: Low if properly documented.

Option 2: Structural change

Evaluate this if landed cost is killing your margins on key categories, you can find alternative suppliers with equivalent quality and capacity, and you have 6-12 months to execute a transition.

Your options: bonded warehouses (defer duty payment timing), FTZs (if you're doing value-add work in the US), nearshoring to Mexico (USMCA can eliminate duties on qualified goods), diversified sourcing. Timeline: 6-12 months. Savings potential: 15-40%. Risk level: Medium to high.

Option 3: Complex structures

Bring in experts if you're importing significant volumes from China where first sale could apply, you have overseas entities creating related-party transactions, or you're considering offshore trading companies or significant restructuring.

Timeline: 6-18 months. Savings potential: 20-50% if structured correctly. Risk level: High (Customs audit risk, tax implications). Cost to implement properly: $100K-300K in legal/tax advisory.

Week-by-week action plan

Here's what the eight weeks look like in practice:

Week 1-2: Data Collection

• Get executive sponsorship (you need CFO + CPO buy-in)

• Check importyeti.com to confirm you're the importer of record

• Email customs broker for 12 months entry history

• Pull ERP data

• Reconcile the two datasets

• Brief Legal on project scope

Week 3-4: Analysis

• Build master SKU database with HTS codes, origin, costs

• Calculate landed cost for all imported SKUs

• Identify top 100 SKUs by total duty spend

• Run preliminary scenario analysis

• Document quick wins

Week 5-6: Supply Chain Mapping and Scenario Modeling

• Map Tier 1 and Tier 2 suppliers for top categories

• Identify supplier capabilities and flexibility

• Assess product development assets

• Determine which categories are movable vs. locked in

• Build detailed scenario model (5-7 different tariff scenarios)

Week 7-8: Documentation, Compliance, and Strategy

• Complete documentation audit (sample of recent entries)

• Identify compliance gaps

• Calculate financial buffer requirement

• Identify which external expertise you need

The bottom line

Every expert I talked to circled back to the same point. Andy's summary captures it best: "Be proactive. Know what you're importing to the U.S., know what your costs are. Do your due diligence ahead of time."

The companies handling this tariff environment well aren't the ones who jumped on the first strategy they were pitched. They're the ones who took the time to understand their actual exposure, document their supply chains properly, and build the analytical foundation to make real decisions.

Parker put it simply: "The reality is every importer is likely overpaying on import duties in some capacity. It might be 1% or it might be 100%." The only way to know which camp you're in is to do the baseline work.

Eight weeks. That's all it takes to build the foundation. After that, you can evaluate any strategy from a position of knowledge rather than hope.