Sales tax holidays: the good, the bad, and the ugly

by Lucinda Rowlands July 22, 2013

Sales tax holidays

Sales tax holidays

Summer is here in full swing which means it’s time for vacation! Across the country, Americans are taking their annual breaks to visit family, relax on the beach, and just enjoy some much deserved rest. In the spirit of the season, state governments are getting ready for their annual break as well: the sales tax holiday.

These holidays give vendors a reprieve from collecting sales taxes on certain items for a few days. Sounds pretty helpful

Seventeen states will be offering back to school shopping sales tax holidays in 2013.

and uncontroversial right? Actually, these events are a hot topic for debate and have both vocal supporters and opponents.

The basics of sales tax holidays

In 2013, 17 states will hold some type of sales tax holiday. Each holiday outlines rules for what kind of purchases will be eligible to avoid sales taxes. Only specific items are eligible and there are typically transaction limits, for example a holiday may only exempt sales below $100.

Back to school sales are a popular theme for sales tax holidays and many of these are coming up. For example Texaswill hold its sales holiday will be from August 9th to August 11thand will allow vendors to not collect sales taxes on back to school items like clothes, books, school supplies, and computers. The state limits each transaction to less than $100.

States also hold sales tax holidays for energy efficient appliances, items to get ready for hurricanes, and hunting supplies with the holidays matching the appropriate time of year for these products. Louisiana helps residents get ready for hunting season by holding a tax holiday on hunting supplies from September 6th to 8th.

Some states hold more than one sales tax holiday for different categories. Virginia and Louisiana are holding the most this year by hosting three holidays.

Arguments for sales tax holidays

So what gets people so heated on the topic? Well, let’s start by looking at why people love these holidays. Many small business owners are big fans of this tax break. It gives them a few days to offer customers a temporary tax break which makes many products more affordable. This arguably brings more business to local, brick and mortar businesses that might have gone online to avoid sales taxes (though the Marketplace Fairness Act might one day make that a thing of the past.)

Katherine McRee and Susan Day, owners of several children’s clothing stores in Alabama, say that the state’s tax holiday makes a big difference to their bottom line. “August sales have gone up by about 40% since the state began its tax holiday in 2006,” said the two owners.

Sales tax holidays are also quite popular with consumers, especially low-income households. Sales taxes add up, especially on big ticket items. In North Carolina, this year’s sales tax holiday exempts taxes on a computer purchase up to $3,500. Considering the state’s sales tax rate is 4.750%, this adds up to real money fast.

Some state governors and other politicians are also fans because they believe these events help stimulate the local economy and attract business from other areas. Basically the holidays are a short-term investment to help promote more growth.

Arguments against sales tax holidays

Considering these benefits, what issues do people have against sales tax holidays? Quite a few, actually. Some government officials believe that the benefits of a sales tax holiday don’t justify the large cost to the state. The North Carolina senate is one group making this argument. Government officials said the three day back to school sales tax holiday cost the state nearly $15 million in lost revenue. This is money that cash strapped state governments desperately need for schools and infrastructure repairs.

Holiday opponents also question whether a sales tax holiday actually stimulates the economy. After all, many tax-exempt items are pretty essential items like school supplies and air conditioner units. Consumers are likely to buy these things anyway regardless of the tax cost.

Retailers aren’t always thrilled about sales tax holidays either. These holidays come with a boatload of rules. At a minimum, vendors need to keep track of which items are eligible and which aren’t, the dollar limit per transaction to qualify for the holiday, and the dates and time of each holiday. Things can get even more complicated like what if a customer from out-of-state makes a purchase through a company’s website, does the holiday still apply? What if a customer wants to return or exchange an item after the holiday? You can see how this can sometimes turn into more work than it’s worth.

The Tax Foundation backs up this viewpoint. This tax research group says that tax holidays complicate life for business owners as it forces them to revamp business software and procedures for a short period, only to have to switch back after the holiday. It adds up to a lot of work for minimal business gains and customer savings. It would be better for states to focus on tax reform rather than creating sales tax holiday.

The debate over sales tax holidays continues to rage on. What matters most to you as a business owner is to stay compliant with whatever rules your state puts together for its holidays. We’ll be sure to keep you posted on these rules as well as the future of sales tax holidays in the United States.

Lucinda Rowlands
Lucinda Rowlands

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