Even experienced tax professionals find it nearly impossible to stay on top of the plethora of sales tax holidays, which occur in some states, on a limited number of days, on specific products, once or twice a year. This article provides a brief history of sales tax holidays, upcoming sales tax holidays in 2019, and potential compliance issues that retailers should be aware of. In addition, it discusses potential issues that individual consumers should know about, such as the fact that taking advantage of these tax holidays is not always the best financial decision.
According to the Tax Foundation, the first sales tax holiday was offered on automobile sales in 1980 in the states of Ohio and Michigan (Joseph Bishop-Henchman and Scott Drenkard, 2017, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy,” http://bit.ly/2PLN1jE).
Businesses should be aware of what items are sales tax free, how to report issues they face, and their role in advertising the tax holidays.
The rationale for states to offer sales tax holidays can be difficult to discern. For some states, it is a way to encourage spending while saving consumers money. For other states, sales tax holidays are designed to alleviate the problem of residents purchasing from a different state, or online, where sales taxes might be lower.
Generally, sales tax holidays fall under broad categories, such as back-to-school or natural disaster prevention. There are a few exceptions, however; for example, Missouri offers a tax holiday for Energy Star products, and until recently Louisiana had a “Second Amendment” tax holiday. The number of states that offer these tax holidays has expanded and contracted over the years. Louisiana had offered tax holidays in the past, but did not include them in its recent budget. Massachusetts, on the other hand, recently approved tax holiday for 2019. As of September 2018, 16 states plan to offer a holiday in 2019 (see Exhibit).
Sales Tax Holidays for 2019
For tax professionals, there are numerous potential issues to be aware of regarding these tax holidays. Businesses should be aware of what items are sales tax free, how to report issues they face, and their role in advertising the tax holidays. Individuals should be made aware that these tax holidays are not always the best way to save money, and in fact might not result in any savings at all. The next section explores these issues in greater detail.
Retailers, especially newer or smaller businesses, can easily be overwhelmed trying to comply with the various sales tax holiday rules. Before the holiday even begins, some states impose restrictions on how much a local business can advertise about the upcoming holiday. For example, Ohio does not put any restriction on advertising for the sales tax holiday, while Iowa does not allow businesses to advertise that they will absorb the tax.
In addition, there may be some differences in the adoption rules of the sales tax holidays for local tax jurisdictions. For example, in Alabama, a county or municipality may provide exemptions of covered items from county or municipal sales or use taxes as long as it adopts such a resolution at least 30 days prior to the weekend of the sales tax holiday. In Arkansas, the covered items are automatically exempt from both state and local sales taxes. In Missouri, a local tax jurisdiction may opt out of participating by issuing an ordinance up to 45 days prior to the start of the tax holiday, and may opt back in by issuing a new ordinance within the same deadline. Therefore, it is important to check whether a business will be required to collect local sales tax during the sales tax holidays.
In general, retailers are required to participate in sales tax holidays and may not charge taxes on items that are legally tax exempt. In some states, however, there may be some exceptions. For example, Florida allows retailers that sell only a few covered items (i.e., 5% of gross sales during prior calendar year) to opt out as long as they notify the Department of Revenue in writing and post a notice in a clearly visible place at the business location.
The items covered are not always as clear-cut as one might expect. For example, Virginia includes disinfectant wipes and compasses as part of its back-to-school items, while Florida exempts notebook paper but still taxes computer paper. Louisiana’s Second Amendment tax holiday exempted guns, bows, and ammunition, but did not exempt tree stands or decoys. It can be quite easy to accidentally include an item that is excluded, or vice versa; therefore, it is important to carefully check the list of tax-exempt items.
After the business understands the items that are exempt, the next step is to check for any dollar limitations. For example, Iowa puts a $100 limit per item on clothing and nonathletic shoes; Ohio imposes a $75 limit on clothing articles (beach capes are exempt, sunglasses are not); Tennessee exempts computers up to $1,500; Missouri limits the total amount of school supplies to $50 per purchase; and South Carolina does not put a dollar limit on items.
Businesses also must determine if there are any rules imposed on the dollar limitation. For example, if an Iowa retailer offered a deal of “buy one shirt at $110 and get a second of equal value for free,” the exemption would not apply. If, however, the retailer offered each shirt at 50% off, the exemption would apply for each item. In Ohio, a sales discount is used to determine the final price of the item, but a rebate offer is not. Several states make specific rules prohibiting retailers from splitting a pair of shoes to get under the exemption limit (i.e., if the pair sells for $140, the retailer cannot sell two individual shoes for $70 each).
There may be some differences in how each state treats layaway items. For example, New Mexico allows the exemption for layaway items only if the final payment is made and the customer receives the item during the tax holiday period; Iowa allows the exemption if the customer puts the item on layaway or makes the final payment during the holiday; and South Carolina does not allow the exemption for any layaway items.
In general, states also exempt sales tax on mail or online orders during these holidays; however, there may be some minor differences on how each state applies the exemption. For example, in Connecticut, the sales tax exemption applies to covered items purchased through mail order, telephone or Internet as long as the customer pays or is fully charged for the item during the tax holiday period. Iowa allows the exemption if the customer places the order or receives the delivery during the tax holiday period.
Regardless of the specific rules regarding online sales, businesses must also be aware of the rules for shipping and handling costs. In some states, such as Texas, tax exemption may be disqualified if adding shipping and handling charges increases the total purchase price above the exemption threshold (e.g., $100). For example, a tax-exempt clothing item costing $90 would be taxable if the shipping and handling cost came to $12 (for a total purchase of $102). In Connecticut, adding a shipping cost to an eligible item costing less than $100 does not make the item taxable, even if the total purchase price exceeds $100 after the shipping cost is added; however, if the handling charges are separated from the shipping charges, the handling charges are considered service charges and part of the sales price of the eligible item’s price, in which case will they be included in the determination of whether or not the exemption limit is reached.
Even after the sales tax holiday is over, businesses also must be aware of how to handle returns of items purchased during the holiday. Most states (e.g., Iowa, Mississippi, Virginia) allow an item-for-item exchange without charging sales tax (e.g., exchanging the same item for a different size or color). If, however, the business gives store credit and the customer uses that store credit to purchase a new item, then sales tax would generally be charged on the new item.
Finally, clients also must be made aware of any reporting requirements regarding the holiday. Some states (e.g., Arkansas, Texas) allow businesses to leave those sales that are exempt off of their applicable forms. Other states (e.g., Missouri, Oklahoma, South Carolina) require the businesses to report everything and then take a deduction for sales that occurred during the holiday. Note that if the seller did accidently collect a tax on an exempt item, it should remit that incorrectly collected tax to the state.
Although the issues facing consumers are not nearly as complex as businesses, some individuals might have questions about sales tax holidays. Although the holidays can save individuals some money, there are some important issues to consider.
First, as mentioned previously, the applicable items are not always intuitive. Next, many businesses tend not to offer additional sale discounts during these sales tax holidays. Depending on the item the individual wishes to purchase, it might be financially smarter to buy it during a sale period instead of waiting until the sales tax holiday. Finally, individuals who travel to a different state to take advantage of their tax holidays may still be liable to pay their home state’s use tax.
Although some states already have made their holidays official for 2019, some will not do so until later in the winter or early spring. Make sure both business and individual clients are aware as soon as possible about the applicable items, prices, and reporting requirements. This can be especially important for smaller businesses with limited bookkeeping capabilities and newer businesses that are experiencing these holidays for the first time. Most states also have detailed information on their respective revenue departments’ websites.