Have you ever wondered if those giant Toblerone bars, designer perfumes and bottles of alcohol sold in duty-free shops are as good of a deal as they're hyped up to be? To most people, the term "duty free" sounds like a discount, but what does it really mean? And will a duty-free sign always lead you to a good deal? Read on to find out.
The "Free" In "Duty-Free"
A duty is simply a tax. Duty-free items are thus tax-free. The first thing that probably comes to mind when you think of a tax levied on retail purchases is sales tax. However, the tax in this case is the import tax that retailers are normally required to pay on the imported items they sell.
You'll find duty-free shops in the international terminals of airports, on airplanes, on cruise ships, at seaports and at international borders; the goods they sell can only be purchased by consumers leaving the country. The idea is that since the items are not being consumed in the country, they shouldn't be subject to import taxes. In theory, duty-free shops pass these savings on to consumers. At some duty-free shops, you'll also avoid paying sales tax.
The Little Shop of Vices
When you're in a duty-free shop, you'll notice that they tend to carry only certain categories of goods, mainly perfume, cigarettes, alcohol, chocolate, jewelry, cosmetics and designer items. According to DutyFree.com, consumers can expect to save 25-50% on items purchased at duty free shops, while Duty Free Americas, the largest duty-free retailer in the Western Hemisphere, states that consumers can expect savings ranging from 10-50% depending on the category of goods, with liquor and tobacco offering better savings than other items.
In addition to the absence of import taxes, items purchased in duty-free shops can be less expensive because they may be free of their usual category-specific taxes. Alcohol and cigarettes purchased at regular stores typically have a sin tax added to them that is designed to discourage excessive consumption of these items as well as to raise money for local governments. Likewise, designer items, perfume and jewelry may normally be subject to a luxury tax. (Learn more about the logic behind these taxes in Do Tax Cuts Stimulate The Economy?)
There are restrictions on the circumstances under which duty-free items can be purchased. For example, if you're bringing duty-free items into the United States, you must be returning from an international trip lasting at least 48 hours. Also, for the most part, you can only bring duty-free items into the U.S. once every 30 days.
The Duty-Free Dilemma: It Isn't Always Cheap
There is usually a limit to how much duty-free stuff you can buy.
Many countries allow you to bring in only a certain dollar amount of items without imposing an import tax. Also, some countries have quantity limits on the types of items you can bring into the country - this is most common with items like cigarettes and alcohol. The United States is one of these countries: it places limits on tobacco products and alcohol.
Stores do not always pass on their duty-free savings to the customer. All duty-free means is that the store does not have to pay customs tax because the items weren't technically imported into the country. The presumption is that the store will pass the tax savings on to the customer, but it is not required to do so. Many items will be marked up so that their total cost to the customer winds up being roughly the same as buying them in a regular store. Duty-free shops have varying prices. You might think that items will have a flat or uniform cost at duty-free shops, but you'd be wrong. Duty-free prices can vary from store to store and country to country, and you can also get different prices from the duty-free cart on the airplane versus the duty-free shop in the airport. The result is that it's hard to know what location is going to have the best price for the item you want. (For related reading, see Seven Saving Tips For Summer Getaways.)You may have issues with getting your duty-free items through the airport. If you aren't familiar with the rules, your duty-free purchases can quickly become a major hassle. In some countries, duty-free shops will place purchases in tamper-evident bags and passengers will be allowed to board with them even if they contain liquids, which generally aren't allowed in carry-on luggage in quantities greater than three ounces. However, if you have a layover in another country, it may not accept the same bag as a carry-on. The U.S. Transportation Security Administration recommends buying duty-free liquids on the last leg of your trip to avoid problems with exceeding the three-ounce rule.
Deal or Double Crossed?
Don't just assume that you're getting the best deal just because you're buying duty-free. Buying duty-free items can lead to some significant savings, but it isn't inherently cheaper than buying from a regular retail store and it may be more hassle than the savings are worth. And when you don't know the rules for the countries you're taking items into or out of, you can end up paying unexpected taxes on your purchases. A little research ahead of time can help you determine if you're really getting a deal by buying duty free. (For additional reading, see Globetrotting On A Budget and Travel Smart By Planning How You'll Pay.)