If you’ve caught a flight in an international airport, you’ve likely seen shops in the airport marketing that they are “Duty Free Zones”. While most people may assume this means that goods purchased there are free from some type of tax, have you ever stopped to wonder what a duty is, and why these shops are located where they are?
A duty is a special levy of tax on the import or export of goods and services. For example, the U.S. Customs duty is a tax imposed on goods when they are transported across international borders. This is basically done to control the inflow and outflow of goods to and from the U.S., protecting our economy and jobs. Duty rates are charged as a percentage of the purchased value of the article paid in a foreign country, and the duty charges can vary from country to country.
It would be a bit outrageous if you had to pay duty tax on little trinkets and gifts you bring home for your family after a vacation, so a personal exemption is allowed. The personal exemption depends on the type of items brought back, and can be $200, $800 or $1,600. You are also limited on the amount of alcoholic beverages and tobacco products – for example, only 1 liter of alcohol beverages can be brought back duty free.
These duty free zones, like the shops located in airports, are free only for the country in which the shop is located, so it could be subject to duty upon entering the destination country (or upon re-entry to the home country). The following example is given by the U.S. Customs & Border Protection: If you buy alcoholic beverages in a Customs duty-free shop in New York before entering Canada and then bring them back into the United States, they will be subject to Customs duty. Basically, items purchased at a duty-free shop are free from the export taxes associated with taking goods away from a country, but not free from the import taxes imposed by the destination country. Again, these rules vary from country to country and type of good.
This information is general in nature and should not be relied upon. If you have specific questions, please contact your Henry+Horne advisor.
Haley M. Braun, CPA