How It All Started and Where It Is Today
How Duty Free Started
Duty Free has been around for a long time. It was originally developed to supply vessels with goods exported for consumption on long sea voyages. This practice continues to this day on commercial ships and international ferries. The same export principle applies to the sale of Duty Free goods at many border crossings around the world. In addition, diplomats and some military forces also enjoy Duty Free privileges.
Air Travel Duty Free Sales
But the most popular form of Duty Free, and the one which most of us probably know best, is what you find when you travel by air. And that’s what this website is all about.
Duty Free sales on international flights were originally allowed by the Chicago Convention of 1944.
But Duty Free sales at airports had to wait for the ingenuity of the Irish.
In 1947, in a burst of commercial creativity, the Irish reinterpreted the export concept to apply to sales to international passengers leaving or transiting through Shannon Airport. Thus was born the first airport Duty Free shop. The idea caught on and expanded rapidly around the world. In no time, a whole new industry emerged.
In the beginning, the concept applied only to those products on which excise duty represented most of the tax – the original range of tobacco, alcohol, and perfumes (because of their alcohol content.)
I think it’s worth pointing out that, contrary to what you read in many online definitions of Duty Free, excise duty is not an import tax. It’s an indirect tax applied to an entire category of products, irrespective of their origin. It’s in addition to the other tax elements of Value Added Tax or sales tax and, occasionally, import taxes. In today’s world, excise duties are most commonly applied to tobacco, alcohol, and gasoline.
Although the term Duty Free stuck, Duty and Tax Free would have been more accurate. In fact, excise duty was removed from perfumes many years ago, making them only Tax Free. So, tobacco and alcohol are the only products which remain truly Duty Free today.
Gradually, the merchandise range grew to include items like electronics, cameras, and other gadgets, and then confectionery, accessories, fashion jewellery, clothing, and even luxury and designer goods. As a result, airports were transformed into the giant shopping malls selling the broad range of merchandise we see today.
The retail structure was pretty straightforward. On the one hand you had the core Duty (and Tax) Free offer of alcohol, tobacco, fragrances, and then cosmetics and confectionary – sold in the main Duty Free airport stores. And on the other hand, you had the Tax Free merchandise, whether sold by those same Duty Free retailers or specialist shops.
A few countries also took a rather more liberal approach to the export requirement by permitting Duty and Tax Free sales to arriving international passengers, although the rationale for this approach is a little dubious.
How the EU Transformed Duty Free
Everything was going pretty smoothly until 1999 when the European Union threw a spanner in the works by abolishing Duty and Tax Free sales to passengers travelling within the European Union (intra-EU) as being incompatible with the single market.
Retailers and manufacturers responded quickly by offering intra-EU (including domestic) passengers a pseudo Tax Free offer. With the exception of tobacco and most spirits, prices to EU travellers on the main Tax Free products were discounted to the same level as the Tax Free prices to travellers leaving the EU. The following guide from Schiphol’s website offers a good description of the concept. Click the image for a full size version.
The message was often “Tax Free prices for all passengers.”
While the prices looked Tax Free, they were actually Tax Paid, with the retailers and manufacturers subsidizing the discount.
The industry struggled to come up with a suitable name for this, eventually settling on Travel Retail, reflecting the fact that these discounted prices were only available to bona fide travellers.
By the way, as a shorthand term, I’ve decided to refer to these sales as Tax Discounted. It’s a clearer and more precise description than the more general “Travel Retail” (as you’ll see in the next section.) Plus it slots in nicely between Tax Free and Tax Paid.
Travel Retail achieved its goal. It significantly softened the impact of Duty Free abolition on EU travellers to the extent that many didn’t even notice it.
In addition, it was a boon for the industry. It greatly enlarged the customer base, not just in Europe, and also opened up opportunities for the introduction of products which wouldn’t have been normally associated with Duty Free and weren’t even Duty or Tax Free. As a consequence, what was initially feared to be a major disaster turned out to be a minor blip in the industry’s long term growth trend.
Today’s Duty Free, Tax Free & Travel Retail
So what’s it all about today?
The industry refers to itself as Duty Free and Travel Retail (although most people still call it Duty Free.) The Duty Free part is pretty easy to define – it’s what it’s always been. For Travel Retail, though, it’s a different story.
The industry was pretty quick in agreeing on the name, but not really on what it meant. Frankly, there’s still no real consensus. Thus, it’s become a bit of a vague catch all, with no hard and fast rules, which is probably why it’s never been promoted to the general public as a complement to Duty & Tax Free.
Does it refer to the Tax Discounted products only, their combination with Tax Free products available to all passengers, Tax Paid, or what? Or does it mean everything you’ll find as a passenger? You’ll get a different answer depending on who you talk to.
Only recently have I run across a clear definition of Travel Retail. APTRA, a regional trade association, defines it as “sales made in travel environments where customers require proof of travel to access the commercial area, but which are subject to taxes and duties.” That means it includes not only Tax Discounted merchandise, but Tax Paid as well, including such shops as newsstands and bookstores.
So, to be precise about it, what you have today is Duty Free, Tax Free, and Travel Retail and this is how it breaks down:
DUTY FREE (includes Tax Free)
Duty and Tax Free
Sales to international travellers, but not within the EU. Duty and VAT deducted.
Sales to international travellers, but not within the EU. All or part of the VAT deducted.
Tax Discounted – Tax Paid Goods Discounted Down to the Tax Free Price
Sales to all travellers at the same Tax Free price
Tax Paid – Products at Standard Domestic Retail Prices or Higher
Sales to all travellers of Tax Paid merchandise
For a more detailed list, click here.
There are a lot of exceptions to the above category assignments due to pricing strategies, local practices, tax rules, and distribution strategies, but they’ll give you a general idea of what to expect.