Sales Tax 101

What are sales tax holidays?

by Jennifer Dunn

sales tax holidays

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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 In the history of sales tax holidays in the U.S., some states have created holidays and repealed them.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 online sellers.

Why Were Sales Tax Holidays Created?

While every state’s reasoning is slightly different, states hold sales tax holidays for a few overarching reasons:

To keep revenue within state lines – 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 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 sales tax holiday, no matter what the economy looks like!

To assist with policies – For example, when 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 move – Sales tax holidays are also politically popular with state residents, though, according to the Tax Foundation, sales tax holidays most likely aren’t actually a real revenue generator. The tax policy group claims that sales tax holidays just shift the timing of consumer purchases and that they just create complexity for retailers and state departments of revenue when it comes to enforcing sales tax holidays.

What Do Sales Tax Holidays Mean for Online Sellers?

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.

Online sellers face their own versions of these same problems when it comes to sales tax holidays.

Changing sales tax collection in online shopping carts – Amazon and TaxJar’s SmartCalcs sales tax API both take sales tax holidays into account. Unfortunately, most other online shopping carts are not prepared for sales tax holidays. Online sellers have a few options for correctly collecting sales tax: manually turn off sales tax collection in the sales tax holiday state and then re-adding it once the sales tax holiday is over, or turning off all sales tax collection (again, in the state where the sales tax holiday is taking place) and absorbing the uncollected sales tax in profits.

Choosing the Correct Product Tax Codes – Both Amazon and TaxJar’s SmartCalcs sales tax API solve for sales tax holidays, but in order to do that you need to have entered the correct product tax codes. For instance, a notebook would need to be tagged in Amazon as “A_SCHL_SUPPLIES” in order for Amazon to recognize it as a non-taxable item during a Back to School sales tax holiday.

For now, the most proactive thing an online seller can do is to monitor when the sales tax holidays take place and keep a sharp eye on sales. This is just another example of the complexity that makes sales tax for online sellers so onerous.

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:

When are the sales tax holidays in 2015?

When are the sales tax holidays in 2016?

Sources:

Sales Tax Holidays: Timing Behavior and Tax Incidence by Adam J. Cole

State Sales Tax Holidays in 2015 – The Tax Foundation

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