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Last updated July 2020
In the U.S., sales tax holidays are periods of time where states do not require retailers to collect sales tax.
As with all things sales tax, it can get a little more complicated than that. In the history of sales tax holidays in the U.S., some states have created holidays and repealed them. Some local areas have chosen not to participate, meaning that while an item might not be taxed at the state rate local tax rates still apply. Other times states have allowed local areas (like counties, cities and special taxing districts) and retailers themselves “opt-in” to the holiday.
This post will explain a little bit about the hows and whys of sales tax holidays and includes some advice for eCommerce businesses.
Why do we have sales tax holidays?
While every state’s reasoning is slightly different, states hold sales tax holidays for a few overarching reasons:
To keep revenue within state borders
The very first sales tax holiday in the U.S. took place in New York in 1997. At the time, New Jersey didn’t charge a sales tax on clothing while New York did, and the Empire State noticed that consumers were crossing over to New Jersey to buy clothes. This holiday, which was later accompanied by a policy change on the way New York taxes clothing, was enacted to keep sales tax revenue from the sale of clothing inside the state.
To incentivize consumers to buy certain products
More states adopted sales tax holidays when the economy was booming in the late 1990’s and early 2000’s. Unlike today, state budgets were actually in a surplus, and sales tax holidays were a politically showy way to also offer sales tax relief to consumers. Paradoxically, sales tax holidays are also a way to give consumers relief in bust times. It only makes sense that consumers would love a chance to save a few bucks, no matter what the economy looks like.
To assist with policies
When, in the 2000’s, Pennsylvania was found to be one of the lowest ranking states in the nation when it came to PC use, policymakers created a sales tax holiday on computers.
Another example is Florida, which holds a sales tax holiday on hurricane preparedness items ostensibly to help save consumers and the state money in damages after a hurricane hits.
Georgia’s sales tax holiday on energy efficient appliances was introduced when energy prices surged after Hurricane Katrina. And many states host “Back to School” sales tax holidays to help parents buy clothing, computers and school supplies for their children.
As a political strategy
Sales tax holidays are also politically popular with state residents, though, according to the Tax Foundation, sales tax holidays most likely aren’t a revenue generator. The tax policy group claims that sales tax holidays just shift the timing of consumer purchases and that they just create additional complexity for retailers and state departments of revenue when it comes to enforcing sales tax holidays.
What do sales tax holidays mean for eCommerce businesses?
Even before eCommerce was so common, retailers have had their problems with sales tax holidays, including:
Determining taxability – Most sales tax holidays only apply to certain items and many have price caps on certain taxable items, too. Retailers had to make sure they were treating the sale tax holiday correctly.
Training staff – Staff needs to be informed of the parameters of the sales tax holiday. This proved to be especially taxing for chains or large stores with multiple employees.
Reprogramming point of sale systems – Retailers needed to either reprogram their point of sale systems to exclude sales tax from certain items for a short period of time or handle non-taxable items manually. Both of these things cost retailers time and money.
Timing – Some sales tax holiday bills are passed days or weeks before the holiday takes effect. This isn’t much time to prepare staff and point of sale systems.
How can eCommerce businesses handle sales tax holidays?
Good news! While sales tax holidays were a huge hassle for eCommerce business in the past, the TaxJar API handles sales tax holidays automatically.
When setting up the TaxJar API, just ensure that you have categorized your products. For example, categorize a t-shirt as “clothing” or a set of notebooks as “school supplies.” TaxJar then automatically takes every sales tax holiday applicable to your business into account. TaxJar’s sales tax AI, Emmet, even helps you categorize your products quickly and efficiently.
With the TaxJar API, you won’t have to remember each state’s sales tax holidays, manually switch sales tax collection off and back on again, or face the real possibility of your shoppers navigating away from your store to a competitor who is honoring the sales tax holiday.
When are the Sales Tax Holidays?
Sales tax holidays change from year to year, with some states only approving the exact dates days or weeks before they go into effect. You can see lists of sales tax holidays here:
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.