What is 'Duty Free'

Duty-free refers to the act of being able to purchase an item in particular circumstances without paying import, sales, value-added or other taxes. Duty-free stores are an enticing perk of international travel. These retail businesses sell merchandise which is exempt from duties and taxes with the understanding they will be taken out of the country for use.

BREAKING DOWN 'Duty Free'

Under ordinary circumstances, host countries expect you to pay an import, a sales, a value-added (VAT), or a local tax on goods you buy. However, when shopping in international airports, sea terminals, onboard cruise ships, and during international airline flights your purchase is made in no man’s land. Hence, you are neither in nor out of any particular host country, including the one in which the terminal is located. No man’s land status is a justification for shielding you, as a passenger in transit, from host country taxes. 

Duty-free shopping has a twist in the European Union (EU). Goods you buy while traveling between EU countries are duty-paid, or taxable. Products you buy while traveling to, or away from, an EU country is duty-refund, meaning the traveler must apply for a refund of EU's value-added tax. 

Duty-free shops sell premium branded high markup goods that evoke luxury or vice. Advertisements boast that duty-free prices are 10% to 50% lower than domestic prices. Due to requirements to use the product outside of the host country, the duty-free shop will package your purchase and deliver it to you as you board for departure.

Custom Taxes on Duty-Free Merchandise

Merchandise that is duty-free in the host country may be taxed as you return to your home country. Duty-free regulations vary depending on your country of residence, travel destination, and your length of stay. Other rules apply to the items purchased, the cost of the article, and the country of its manufacture.

In the U.S., you will be asked to fill out a U.S. Customs Form to declare any purchases made abroad. Receipts are crucial, as they prove how much was paid for the product. You will owe duties, or tax, on them if their value exceeds the duty-free exemption for the country from which you are returning. 

Personal exemptions range between $200 and $1600. Additional regulations include limits on the length of travel abroad and waiting periods between frequent trips. Some items, like alcohol and cigarettes, are limited by the quantity, depending on the country where it was bought. Your allowance for duty-free alcohol from the EU, for example, is one liter. Also, travelers should understand that some products sold in other nations are illegal in the U.S.

RELATED TERMS
  1. Travel Expenses

    Travel expenses are costs incurred while traveling specifically ...
  2. Smart Traveler Enrollment Program

    The Smart Traveler Enrollment Program is a service that allows ...
  3. Import Duty

    Import duty is tax collected on imports and some exports by a ...
  4. Traveler's Check

    A traveler's check is a medium of exchange that can be used in ...
  5. Travel Insurance

    Travel insurance is designed to cover the costs and losses and ...
  6. Retention Tax

    A retention tax is any tax withheld from an employee's paycheck ...
Related Articles
  1. Investing

    Why Duty-Free Isn't Always Cheaper

    These purchases include restrictions, and many cases, shopping this way it more trouble than it's worth.
  2. Investing

    Making Money At The Duty-Free Shop

    Travel retail is becoming an increasingly important piece of the global liquor business. I'll look at how this affects some of the players.
  3. Retirement

    Best Places to Retire Abroad

    Mexico beats Panama out for the best country to retire to. Check out why, and other news about the best retirement countries.
  4. Financial Advisor

    Is Travel Insurance a Good Idea?

    Is travel insurance a good idea for your next vacation? This is a look at what policies may or may not cover and when it makes sense to purchase coverage.
  5. Personal Finance

    Consumer Spending on Travel Has Likely Peaked (PCLN, EXPE)

    While consumer spending on travel recovered quickly following the recession, it has been outpacing wage and GDP growth, and has thus likely maxed-out.
  6. Insurance

    The Basics Of Travel Insurance

    Before going on your trip, find out what kind of insurance coverage you will need.
  7. Personal Finance

    7 Ways To Save On Last-Minute Travel

    Whether for an emergency or just a cheaper vacation, these tips can save you a ton of cash for last-minute travel.
  8. Retirement

    Things to Consider Before Retiring Abroad

    While moving abroad can stretch your retirement dollars, it can also make handling finances harder.
  9. Trading

    The Cheapest Ways To Get Your Currency Exchanged

    Travelers have a number of options when it comes to exchanging currency. Find out the cheapest way to exchange.
  10. Personal Finance

    Travel Tips: Avoid Exchange Rate Headaches

    How to avoid the most common issues and hassles raised by exchange rates while traveling abroad.
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center