Duty free shopping is the opportunity to buy goods exempted from taxes and excises at certain locations. Travellers bound for countries with heavy taxation can sometimes save a considerable amount of money, especially on products such as alcoholic beverages and tobacco. Even if you do not partake yourself, these products may make good gifts.
"Luxury" commodities such as perfume, cosmetics and candy used to be subject to special taxes in many countries. They can still be found in many duty free stores, though the discount is rather low, only representing the value-added tax.
However, such stores are by no means always the cheapest way to buy. For example, in airports they pay very high rents for airport retail space, have little competition, and generally do not rely heavily on repeat business; so there may be little incentive for management to set really low prices. Commonly in New York or Hong Kong, prices on items like cameras can be better in the highly competitive market downtown than at the airport (Hong Kong has no sales tax, so nothing to deduct for these). Also, not all such stores are really "duty free"; the Ottawa airport, for example, sells cigarettes clearly marked "Ontario taxes paid", and Ontario taxes are high so their prices are well above those in some US states. Also keep in mind that outside North America, the price that one sees on the label already includes taxes so in a lot of cases, the duty free retailer may just retain what is otherwise the difference in the price.
The "tax and duty free shop" concept originated in Shannon, Ireland in 1947 as a means for trans-Atlantic air travellers to purchase spirits for immediate export without incurring local excise taxes. The duty-free shop is a retailer located at an airport, on board a ship or at an international border, situated so that the items sold can not be brought back into the country of purchase without going through Customs. There may also be a possibility to get taxes already paid refunded when leaving a country, if the goods were bought for export and needed procedures followed.
In theory, these items as exports are not subjected to local tax in the exporting country but could be taxable in the country to which they are imported. Many countries provide a small "personal allowance" of items a traveller (oftentimes a household, not just an individual traveller but travellers living together) may bring in without incurring tax. Although regulations vary, a carton of cigarettes or a quart or liter bottle of hard liquor (or its equivalent) carried on return from an international trip of forty-eight hours or more often qualifies, along with a fixed dollar amount worth of luxury goods under these allowances. Limits may apply to the number of times the allowance may be used by one traveller in one year. As the items were taxed in neither country, one would expect them to be less expensive.
In practice, prices at duty-free shops vary widely; it is advisable to compare cost online before buying anything. In some cases, a duty-free purchase does represent a cost savings; in others, it merely represents another venue in which merchants see a captive market (if the one duty-free shop at a border crossing has a monopoly at that crossing), increasing their base price accordingly.
That bottle of Irish whisky carried across the Atlantic from Ireland might be a bargain, while the bottle of maple syrup flown from Montréal on the return trip might have been far less expensive from an épicerie or supermarket. Items which carry little or no domestic tax (such as basic groceries) will almost always be cheaper locally than in a "tourist" establishment – duty-free or not.
Electronic goods, beauty products and luxury items such as designer purses may cost less at home or online so it pays to compare.
If you're not interested in the tax savings, duty-free shops can still be a good place to grab last-minute souvenirs or gifts before you leave the country—the shops will often have a selection of these for travelers who forgot to get them, though they're likely to be overpriced. If nothing else the shops are a way to use up any leftover local currency you want to get rid of.
In air travel, duty-free costs are in many cases allowed for international travel. Travel within the European Union is generally treated as domestic travel, and is therefore not eligible for duty-free. Only travel to a customs-free zone in the EU, Åland and the Canary Islands being examples, or leaving the EU entirely, allows a traveller to avail of duty-free purchases.
The majority of duty-free transactions take place in international airports, where the "jet set" represents a lucrative market airside for a wide variety of branded luxury items. Prices vary widely between countries.
On major airlines, a catalogue of items are sold by flight attendants from a duty-free cart during international flights. However, only very rarely will those items be cheaper than at stores on the ground.
Cruise ship and ferry port terminals may offer duty-free items, e.g., liquor. Cruise ships and some ferries also sell duty-free items themselves from on-board shops while in international waters. Again however, note the cautions in the linked article.
Some cruise lines, such as the Baltic Sea cruiseferries, have duty-free shopping as a major source of revenue and itineraries are sometimes specifically set to make duty free shopping possible.
International travel from one EU member state to another no longer qualifies for duty or VAT exemption. In some EU countries there are "travel shops" near borders on busy roads. For example, people from Austria often buy alcohol, tobacco, perfumes and luxury items in such shops just across the border in the Czech Republic. This is cheaper than buying the same items in Vienna, but not duty free – the prices actually include Czech taxes.
In North America, duty free stores are common on major US-México and US-Canada border crossings, including the main Interstate highways. Duty-free fuel stations are rarely permitted (as motorists can clear foreign customs and then turn around with the fuel still in the vehicle's tank), but have existed in International Falls, Minnesota and Detroit, Michigan.
Some places are exempt or partially exempt from certain taxes or duties. Many of these places are outlying or semi-autonomous territories and dependencies of European Union members that were granted a certain exemption decades or even centuries ago and have kept it since. Do remember however that when taking home your purchases from e.g. Heligoland you may be subject to a lower amount of duty-free "import" than when crossing a normal border between two EU states.
Some border towns in countries such as Uruguay have duty-free shops that are located some distance from the border, so that it's possible to shop even when you're not about to leave the country. The government may prevent locals from taking advantage of the lower prices by requiring shoppers to present a foreign passport in order to make a purchase. This can lead to thriving black markets where foreign citizens stock up at the duty-free shops and then resell the goods to locals at a small markup.
In countries like the Philippines, a duty-free shop exists just outside the airport. Those who recently travelled from abroad can visit this store and enjoy duty-free shopping along with their domestic companions within 48 hours of arrival, subject to purchase limits (those in excess will be subject to normal taxes).
In addition to duty-free shops, ‘normal’ retailers may also offer an option to refund taxes already paid at the customs when leaving a country. Shops that offer this possibility probably announce the option and help you with the procedure, which may involve getting a special receipt and having the package sealed, to show the item was not used before leaving the country (only goods bought for export qualify). If you count on the refund, be sure your purchase is eligible and that there will be a customs office handling the refund when you leave the country. You really need to be aware of the rules and be careful if you ask advice as you may receive conflicting advice. In the case of the European Union, travellers who travel to more than one member state will present their paperwork to customs officers at their final port of departure from the EU.
Sometimes a commercial third-party administers the tax refund. As such, a fixed administrative fee and a minimum spend amount may apply (otherwise there may be no net tax to refund after the administrative fee is deducted). In this respect, such transactions are not completely tax free for the traveller. However, some retailers may permit the pooling of separate transactions done in their store into a single tax refund form; ask before making the first transaction.
Some third-party companies also operate in-town tax refund offices where they can give out tax refunds in cash in advance of a traveller’s departure. When this happens, the traveller needs to provide credit card information as a security. The traveller must submit the usual paperwork to customs within a prescribed time limit. Otherwise, the amount is charged to the credit card the traveller provided.
Often, the refund can be requested in the form of cash, cheque, or credit to a user’s payment card (which does not necessarily have to be the same card used to purchase the good in question). The third option usually provides the most value for travellers though it can take up to a few weeks to get reflected on your statement..