Tax Break: The TurboTax Blog » Value Added Tax (VAT)

Duty-Free Shopping: A Beginner’s Guide

joshritchie — Fri, 22 Jun 2012 16:55:59 +0000

If you’re a true bargain hunter, you’ve probably heard about duty-free shopping before. It’s an opportunity to save tens or hundreds of dollars on your purchases by shopping in areas that have been designated as “duty” (or tax) free. Unfortunately, like many shopping tactics, duty-free isn’t always clear-cut. Many of us know that it exists, but not in enough detail to actually do it ourselves.

Today, we’ll introduce you to the topic with our beginner’s guide on duty-free shopping.

What Is It?

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Duty-free shopping enables citizens of one country to buy goods in another and bring those goods back home without paying duty (or tax) on some or all of the purchase price. How much duty you avoid is known as your personal exemption, which depends on factors including:

Where you bought the item in question
Whether the item contains tobacco or alcohol

In most cases, your exemption is $800 (but can be as high as $1,600 under certain circumstances.) Another perk: duty-free shops get you out of paying local and national taxes of the country in question. If you buy a luxury item from a duty-free shop in France, for instance, you will pay France’s value-added tax at time of purchase, but you can apply to get it refunded later on. This adds another layer of savings on top of the duty you avoid upon returning to the United States.

Where Are The Duty-Free Shops?

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Most of the duty-free shops you’ll find are located in airports, sea ports, on ships and on airplanes. This is no accident. Retailers know (from decades of experience) that you are most likely to buy right when you arrive or right when you leave. To capitalize on this tendency, most duty-free shops are placed in these high-traffic areas for convenience.

Note however that not all duty-free shops reside in these locations. Others are located in shopping malls, along beaches, and at popular tourist areas. It all depends on the country you are visiting.

Important Rules

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It’s easy to get so caught up in the savings potential of duty-free shopping that you neglect important rules. It’s critical to know what is and isn’t permissible, because failure to follow the rules can lead to steep surcharges. Perhaps the most important restriction is this one, explained by DutyFree.com:

If you’re a U.S. citizen returning home after staying at least 48 hours in a foreign land, you typically may bring $800 of duty-free merchandise into the country. If you exceed that limit, you’ll pay a 3% surcharge on the next $1,000 worth of purchases. Those with over $1,800 of merchandise must pay a tax of up to 25% on the amount that exceeds this limit.

Other key rules include:

Americans visiting a foreign country for LESS than 48 hours typically only get a $200 exemption
Family members can combine exemptions (example: a family of three could bring $2,400 worth of goods home, duty-free)
Children do not get tobacco or alcohol exemptions. Thus, these items must be taken home by adult family members
Tobacco and alcohol are treated differently than other goods. One liter of alcohol and one carton of cigarettes are the typical limits for duty-free importation

Best Duty-Free Zones

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Like traditional malls and stores, some duty-free shops are better than others. The last thing you want to do is travel somewhere far away (in search of huge savings) only to find lackluster or non-existent deals when you get there. Luckily, various publications have put together lists of the best duty-free shopping zones in the world.

Take this one from Esquire, for instance. Whether you are looking for Lacoste shirts, Chanel No. 5, or Neuhaus Chocolate, guides like these direct you straight to the best deals and biggest savings (so you can avoid chasing fruitless sales.)

When Is It Worthwhile?

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Experts are divided on whether duty-free shopping is actually worthwhile from a dollars-and-cents standpoint. A recent USA Today article on the subject, for instance, stated:

“Duty-free is almost never a deal for the casual shopper out to get a bargain,” says Jason Clampet, a senior editor for travel guidebook publisher Frommers.com. “You can save significant amounts if you’re a smoker who lives in a state with high taxes, but you’ll find that electronic goods, beauty products and luxury items such as designer purses usually cost less at home or online.”

The article went on to say that duty-free shops in the U.S. are almost never worth visiting for a U.S. citizen. Rather, Americans in search of big-time savings are advised to head abroad. Liquors and wines, in particular, are recommended for pickup in their countries of origin. Meanwhile, Americans are advised to buy electronics, watches, and handbags at home (due to both the cost and the high likelihood of being sold a fake.)

Feeling Taxed? Time to Travel!

joshritchie — Thu, 10 May 2012 20:24:23 +0000

The tax season is over( well for most of us), summer’s almost here, and many of us are ready for some much needed rest and relaxation. With tax refunds already in hand, vacation spending is on the rise this year with the majority of traveling Americans expected to spend the same or more on their travel excursions. Before you hit the road, check out our infographic presentation, which shows how Americans plan to spend their vacations and compares value added taxes in some of the more popular travel destinations.

Interactive by joshritchie

What are your travel plans this year?

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Value Added Taxes Around the World

joshritchie — Fri, 04 Jun 2010 19:47:43 +0000

Some Americans are unfamiliar with the concept of a value added tax. While no value added taxes (or VAT) yet exist in the United States, they are collected throughout much of Europe. The basic idea of a VAT is that of a more comprehensive sales tax. Instead of a stated, uniform percentage being added to the final price of an item, as is currently done in America, VATs are assessed at each stage of production. Producing a loaf of bread, for example, would involve the wheat farmer, the baker and the grocer each paying their own separate tax on their contributions to the bread. Some are proposing that the U.S. adopt a VAT in the near future.

Below are some of the more well-known value added taxes from other countries.

France

(Eustaquio Santimano)

Critics of a VAT in the United States have pointed out the correlation between VATs and higher overall taxes in foreign countries. They also lament the higher prices that tend to be created by VATs. Both of these are present in France, which levies a 19% VAT on all products and services other than those which qualify for the “reduced” VAT of 5%. A May 20 BusinessWeek article implied a link between France’s high VAT and the abnormally high rate of bankruptcy among restaurants in that country.

The French government evidently reduced the VAT on dining to 5.5% (down from 19.6%) in July of 2009, in exchange for the restaurants vowing to lower their prices by 3%. Unfortunately, BusinessWeek points out, “the typical restaurant tab has declined only 1.17% since the cut took effect.” The reason does not appear to be restaurant greed, but rather, the unavoidable systemic effects of the VAT. Gérard Guy, head of a consortium of independent restaurateurs, remarked that “it’s very difficult…to lower prices when the cost of ingredients keeps going up.” The ingredients, of course, are also subject to VATs independently of those that the restaurant owners pay.

Great Britain

(TJ Morris)

In recent years, England has been somewhat of an exception to the rule of high European VATs. Unfortunately, reports have surfaced that their value added tax rate could be on the rise, too. The UK’s Times Online reported in February that England’s 17.5% VAT rate could be hiked as high as 20% (the EU average.) While it remains to be seen whether England’s VAT rate does in fact rise, there has been growing suspicion of VAT fraud in that country during the last several months.

On May 23, GovMonitor broke the story of an alleged £38MM VAT fraud in which an organized crime syndicate is said to have traded a substantial number of high-value carbon credits. As GovMonitor explains, the crime syndicate operated a number of fraudulent companies which allegedly bought the carbon credits from overseas sources. While no value added taxes were collected on the overseas purchase of these credits, the credits were subsequently sold to “businesses in the UK at a VAT inclusive price.” Naturally, the VAT charged by these bogus businesses was never paid to any government entity – it was simply pocketed.

Italy

(travellingtamas)

Italy is often used as an example of a country whose VAT rate has steadily crept higher since being instituted. In an April blog post, the Heritage Foundation revealed that Italy’s VAT rate began at 12% and now sits at 20%. Perhaps not coincidentally, Italy is also known as one of most tax-evading nations of Europe. EUBusiness.com reported in February that Italy was launching a new and more aggressive probe into tax evasion, spanning 2,000 Italians who are “allegedly evading more than 2.0 billion euros in taxes” by way of various foreign tax shelters.

The bulk of the alleged tax cheats are said to reside in Italy’s wealthy northern regions and near the capitol city of Rome. BlogFromItaly.com claims that owners of “flashy cars” are routinely pulled over and probed about tax questions by Italian tax authorities. Interestingly, both the Heritage Foundation and EUBusiness.com point out that Italy has long had one of the world’s heaviest debt burdens (1.76 trillion euros, or about 115% of 2009′s GNP) despite the VAT being touted early on as a spending reducer.

Common Effects

(55Laney69)

Value added taxes by their nature have similar effects in almost every country where they are collected. In a separate blog post, the Heritage Foundation touched upon three things that VATs have brought into being, whether the country is in Europe, Asia or South America. First, while the VAT is frequently touted as a replacement of or offset to the income tax, this has rarely (if ever) occurred. In reality, VATs are usually implemented as a supplement to income taxes and thereby result in a heavier overall tax burden than before.

Although Europe once had a tax burden minimally larger than America’s, Europe’s “aggregate tax burden has increased by about 50%” since VATs came into being in the late 1960′s. The U.S. tax burden, conversely, has “remained relatively constant” since then. Furthermore, VATs have not only failed to replace income taxes, but have actually coincided with higher income taxes in many nations. Countries like Italy and Greece also demonstrate that the presence of a VAT alone does little to discouraging government spending or debt.

Of course, different countries levy different VAT rates, and the rates charged can diminish or amplify these effects. A comprehensive breakdown of different VAT rates around the world can be found at VATCalculator.com, for those interested.