The True Cost of the Sales Tax Holiday

You would be hard pressed to find someone who doesn’t like a bargain, which is why so many retailers offer sales throughout the year. You can find a sale for pretty much any holiday, the Memorial Day sales, Fourth of July sales, Black Friday, back-to-school sales and so on. Shoppers flock to take advantage of these low prices, which is why retailers continue to provide them.

Sales tax holidays, however, are very different from a sales event. Instead of retailers choosing when these happen, they are put in motion by the state government, as well as deciding what qualifies for tax exemption. Retailers don’t suffer from a profit loss from these sales tax holidays, instead they take a bite out of state and local tax revenues.

So why do states offer a sales tax holiday?

The True Cost of the Sales Tax Holiday
On the surface, the sales tax holiday seems to be the perfect break for everyone: shoppers save money, retailers get extra businesses and your lawmakers are able to say they support a tax break.

Below the surface, however, you’ll find that they aren’t all they seem. First, sales tax holidays are so brief that most shoppers don’t even have the chance to take advantage of them. For retailers, this holiday makes sales tax compliance much more complicated and requires additional training of staff. And finally, the state hosting the holiday loses out on revenue big time. In 2015, Massachusetts reported that their sales tax holiday cost the state $25.5 million. So although there may be a boost in sales, it may end up costing everyone more in the long run.

So, do the sales tax holidays really boost sales?

Boosting or shifting?
During the back-to-school time, every state sees a boost in children’s apparel sales. According to a senior editor at RetailMeNot.com, “Mid-July is the kickoff for the back-to-school shopping season.” However, states that offer a sales tax holiday typically see sales during the first 3 weeks compared to states without them. Of the 16 states that held a sales tax holiday, 11 of them saw unusual spikes in 2015 for children’s apparel during the week of the holiday. This is all in despite of the fact that shoppers could probably save more money shopping during the retailers sales at the end of the back-to-school season (sales tax holiday prices are usually reduced by 4% to 10%, whiles retailers can give savings from 20% to 50%).

The data truly shows that there was a shift in back-to-school sales, rather than a boost. The Tax Foundation research, an independent tax policy research organization with a conservative bent, shows that shoppers will shop the way they do for back-to-school items whether there is a sales tax holiday or not, it just pushes their shopping habits from one time of the month to another. There isn’t an overall increase in sales for the season.

Here is a breakdown of children’s apparel sales

State Statistics
In 2015, states without a sales tax holiday saw a 51% increase in children’s apparel sales during the first August. Some states with a sales tax holiday, however, had an even further bump in addition to the 51% increase:

  • New Mexico: 24%
  • Oklahoma: 20%
  • Tennessee: 19%

On the other hand, some states with a sales tax holiday saw no increases. In fact, instead of a bump, they seem to have a slump during their tax-free time:

  • Florida: -2%
  • Texas: -5%
  • Virginia: 4%

These numbers suggest that there is no clear reason for why there is an increase in sales during the sales tax holiday. New Mexico may have done a really good job advertising the holiday, so more shoppers turned out. While those in Florida may have considered that they will save more with the retailer slashes and held off until the end of the month. We may not know why some states did better than others, but it does show that these sales tax holidays have an effect on consumer behavior.

Compliance Burden
It doesn’t matter if the sales tax holiday boosts sales or if they shift them, the compliance burden is undeniable. Small retailers without a large accounting department or retailers doing business in multiple states can have an especially difficult time. The rules will differ from state to state, for example:

  • Texas exempts delivery charges during sales tax holidays, but Virginia taxes them
  • Georgia exempts helmets from their summer sales tax holidays, but Tennessee taxes them
  • Tennessee does not charge tax on computer and computer related products costing less than $1,500 during their sales tax holiday, but Georgia requires the computer product to cost $1,000 or less to qualify

Even more confusing for retailers to figure out, is that depending on the state the sales tax holiday may not always apply to the total rate of tax. For example, in Alabama, local governments are not required to participate in the sales tax holiday, so the state tax may be exempt but the local portion may still apply. Louisiana only exempts the state portion of their tax during its August holiday but exempts both state and local during its Second Amendment holiday.

Trying to keep track of all of these sales tax holiday changes can be almost impossible if done manually. These holidays can change every year, as well, like in Massachusetts where the legislators decide every year whether to have one or not. Avalara’s AvaTax software automates the sales tax compliance process for you, ensuring compliance during sales tax holidays. Get your free copy of the Tax Compliance for the Holiday Season Guide and Readiness Checklist.

Click here to read the Tax Compliance for the Holiday Season Guide and Readiness Checklist

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