Duty free, Italy, Italy (Photo by Zhanyanguange)

Just what are Duty Free Stores in airports and when is Duty Free shopping a savings?

Those Duty Free Shops that you pass through in airports and cruise terminals, or the Duty Free catalogs they flog on you on board planes and ships, are offering to sell you items without the local government sales tax (or "duty") added in. 

That is to say, it is the local, Italian IVA (VAT) tax you are avoiding, which is 22% and is normally figured into the price on the tag (not added on at the register, as in the States). Essentially, it's like getting your IVA (VAT) refund before you buy.

This loophole dates back to Ireland's Shannon airport in 1947, when someone got the bright idea that, since air terminals represent a kind of no-man's land between being and not being in a country, people passing through should be able to purchase items (usually goods of luxury or vice: jewelry, alcohol, and tobacco) without paying the standard import duty—so long as they're in the process of leaving the country.

A word of warning, however. Though the Duty Free concept is still alive and well, it's not always the bargain it's made out to be. Lately, duty free shops have gotten greedy and now often charge the same, if not higher, prices than the shops downtown. That means they are really ripping you off, since they're pocketing that hidden 20% extra that would be the state tax.

Play it safe: Know what the going price is on anything you intend to buy "duty free," as well as the local IVA (VAT), so you can tell if an item at the duty-free shop truly is a bargain.

Also, you should be aware that, for complicated reasons, you can no longer purchase duty free when flying from one European country to another within the E.U. (so if your onward flight from Rome is to, say, Paris, you can't purchase things from the duty free shop in the Italian airport). However you can still buy duty free items if you are flying to a non-E.U. country, such as returning to the States. 

Note that none of this has anything whatsoever to do with U.S. Customs, which regulates how much you can bring back home without paying a duty—though people constantly confuse the two. You may have avoided paying the Italian duty on those bottles of cognac, but the U.S. customs reserves the right to charge you tax on it once you try to bring it back into the States—if you have more than one liter. For more on that issue, click here.

Duty Free is also distinct (not legally, but as far as you're concerned) from VAT tax refunds or Tax-Free Shopping. For the scoop on VAT and tax refunds, click here.