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, sales, value-added (VAT), or 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.