Value-Added Tax & Duty-Free Shopping while Traveling
You plan to pay your state and federal taxes every year. And you’re probably familiar with the mental calculations of figuring out the final price of an item with sales tax before you get to the register. But have you considered what taxes you should plan to pay when traveling and shopping abroad?
Value-Added Tax (VAT)
Value-added tax (VAT) is a tax on the purchase of a good or service whenever value is added at each stage of the supply chain, from production to the point of sale. VAT is added to the pretax base price of a product and isn’t calculated as a percentage of its final price. This means it should already be included in the price you read on a product’s tag or in the listed price of a service, including hotel rates and restaurant prices (you will usually see the VAT rate as a line item on your receipt).
More than 160 countries use some form of VAT, including countries that are a part of the European Union (EU), and rates range from 15 to 25%. In fact, VAT applies to almost all goods and services bought and sold for consumption in the EU. Goods sold for export or services sold to customers abroad are normally not subject to a country’s VAT.
Travelers are usually entitled to a refund for the VAT portion of prices for goods purchased abroad and brought (i.e. exported) home. Goods and services consumed locally—hotel stays, meals at restaurants, etc.—are not eligible for this refund. The simplest way to get the refund is to have the merchant handle it at the register.
One way to do this is by signing two credit card receipts: one for the pre-VAT price and another for the VAT-included price. The merchant can then give you the appropriate VAT refund paperwork to have stamped at the border checkpoint (in an airport, train depot, etc.). Once you return home, mail the stamped paperwork back to the merchant. With proof that the goods were exported, the merchant can then destroy the credit card slip for the VAT-included price. Or, you could only sign the slip for the full price and then the merchant would refund the VAT amount to your card once they receive the stamped paperwork.
You’ve probably seen duty-free goods being sold inside international airport terminals, ferry stations, cruise ports, and border stops. These items are being sold without charging you the “duty” of local import tax, or the tax for bringing products across international borders. In the EU, duty-free shops also exclude any applicable VAT. This can mean a savings of 5–25%, depending on the country’s VAT rate.
By purchasing an item in a duty-free store, you’re avoiding paying the double tax of local tax on the product plus the tax for bringing it home to the U.S.
There is a limit to this, however: you can spend up to $800 on merchandise and bring it home without paying the import duty. As a general rule, you must pay a 3% import tax on the first $1,000 worth of merchandise over that $800 maximum allowance. Bringing home products worth more than $1,800 means you could be taxed a higher percentage.
Beyond sparing you from paying extra taxes, the purchase price of items can vary between duty-free shops, and it may not be your cheapest option. You could still find a less expensive option online. For the most part, deals in duty-free shops are limited to alcohol, tobacco products, brands that are rarely discounted (like Chanel), and local-made items you can’t find elsewhere (and we don’t mean t-shirts with city names that are made in China). Use any one of the comparison shopping sites or apps to find out if the duty-free shop in the airport is really the best place to purchase specific souvenirs.