I was on vacation recently in Oregon, enjoying the great outdoors. For our first meal, my wife and I went to a restaurant, and I noticed an oddity when I got the bill: no tax charged. For an instant, I thought I was at a scofflaw establishment, but then it hit me: I was in one of those rare states that do not have a sales tax (around the world, also called a value-added tax or VAT).
Fast forward a few days. We had planned to spend our last day in the Beaver State hiking. However, after about 3 hours of powering through its Pacific Northwest mountains, we were beat, and decided to hike no more. Having a few hours to kill, we resolved to shop at a nearby outlet mall, especially to save on that sales tax. I don’t like clothes shopping and only do so about 3 times per year, so we made this one of those occasions. We spent about four hunge, saving about $28 in tax.
This all got me thinking about when’s it worth it to shop tax-free when you travel. I’m not talking about incidental purchases that you would have made anyways; I mean strategically going out of your way to shop duty free. In that sense, I think there are two main considerations: where you are, and whether it’s worth the time spent.
Where Is There No Sales Tax?
In the US, five states have no sales tax: Oregon, Delaware, New Hampshire, Montana, and Alaska*. (That does not mean that a particular locality within these states has not levied a sales tax, but, in general, it’s unlikely you’ll be charged tax).
Outside the 50 states, you can shop tax-free when you travel to many places, including the US Virgin Islands (USVI) and Hong Kong. However, if you live in the 50 states, tax-free shopping outside the 50 states is messy in that, even in the case of the USVI, you are required to report your purchases beyond certain thresholds and pay tax upon re-entry to the 50 states. The game is even more complicated in places like Hong Kong because you have to take into account currency conversion and make sure to use the right payment method.
So, keeping to the 50 states, how do you decide?
How Much Are You Spending?
First, consider the amount. Let’s assume you would pay 7% sales tax in your home state. If you’re going to save $7 per $100 spent, I would not sacrifice vacation time to buy a couple hundred dollars worth of stuff. I just don’t think saving $14 is worth it, plus you have to take into account whether you have space in your luggage for your new acquisitions. Saving $20 or $30 to have to pay an overweight-bag fee of $50 isn’t a good deal.
How About the Bling?
This is where it gets interesting. Say you’re a fan of watches and have always longed for that $30,000 Patek Phillipe or Audemars Piguet, and years ago promised yourself that you would buy it when you made your first million. Well, the check just cleared, and you’re about to spend 30 large on a watch.
If you buy it at home, you’ll pay $2,100 in tax. However, if you buy it in Delaware, you’ll pay zero. There, I’d say it’s definitely worth it. If it were me, I’d even consider travelling there and back within a single day to make the purchase (having called ahead to make sure they have the watch).
What About Airport Duty Free Shops?
The analysis is pretty much the same. When you buy at a duty free shop at a foreign airport, it just means the foreign country where the airport is located won’t charge you tax. However, your home country can still charge you upon arrival. For the US, the official website for US Customs and Border Protection explains that “Duty-Free Shop articles sold in a Customs duty-free shop are free only for the country in which that shop is located. Therefore, if your acquired articles exceed your personal exemption/allowance, the articles you purchased in Customs duty-free shop, whether in the United States or abroad, will be subject to Customs duty upon entering your destination country. Articles purchased in a American Customs duty-free shop are also subject to U.S. Customs duty if you bring them into the United States”.
So, there’s pretty much no way to get around the tax, even if you try to buy at a US duty free shop, travel abroad, and then bring the item back. It’s still subject to taxation upon returning to the US.
Don’t get me wrong, though; by all means buy a well-priced bottle of liquor or a flask of perfume – those will probably fall under the exemption thresholds and will be tax-free. However, don’t buy a $10,000 watch thinking you’ll pay no tax, since that probably won’t be the case.
As I see it, it’s not worth it to go out of your way to save a couple bucks on sales tax. However, if you’re in the market for some serious jewelry, by all means buy it in a tax-free state.
*Source: The Motley Fool