Taking Advantage Of Sales Tax Holidays

Monika Miles

What if you could walk into a store, buy something and not have to pay sales tax because the whole state does not impose a sales tax? Believe it or not, in some states that does happen. Several states, mainly in the South and East, have these so-called “tax holidays,” which at specific goods. As we discuss below, during tax holidays specific items are exempted from the tax, only in certain states, and these holidays occur only on limited days. Very little is uniform in the multi-state tax world.

This is a hotly contested topic; the question up for debate is whether sales actually increase enough to offset the lost sales tax revenue. Researchers found that on sales tax holidays, households increase the quantities of clothing and shoes bought by over 49% and 45%, respectively to what they buy on average. However, evidence shows that these holidays simply shift the timing of these purchases and some retailers will actually raise prices during the holiday, reducing consumer savings.

How did Sales Tax Holidays begin?


Ohio and Michigan enacted the first state tax holidays in 1980, offering a tax holiday on automobile purchases. However, it was New York that, with the first tax holiday on clothing, sparked the interest in other states wanting to have state tax holidays. New York sought to combat ‘border shopping’ by administering tax holidays because New Jersey does not charge tax on clothing during the ‘back to school’ shopping season in late August. Border shopping is the concept of traveling to nearby states to take advantage of lower tax rates. Another example of multi-state ‘border shopping’ is that Manhattan drivers cross the George Washington Bridge into New Jersey to buy gas at the small gas station at the end of the bridge because gas is dramatically cheaper in New Jersey.

What items are exempt from Sales Tax?


Wouldn’t it be nice if all items were exempt from sales tax during these holidays? However, the states limit what is exempt from tax during these holidays. Many states have created their holidays around specific products and industries that they wish to support. These might include clothing, school supplies, sports equipment, computers and hurricane preparedness items. To encourage the use of energy saving products, green appliances are offered for a no tax holiday in select states, such as Georgia, Texas and Virginia.

Where do tax holidays occur?


Tax holidays are not common in the western region of the United States. In fact, our home state of CA hasn’t ever offered them. Besides the holidays for the staples noted above, tax holidays are popular in the South and the Eastern portion of the United States to encourage specific behaviors. For example, these areas of the country are prone to severe and tropical weather. To encourage residents to become self-sufficient during weather disasters, Florida and Louisiana offer tax holidays for hurricane preparedness supplies.

When do these holidays occur?


It would be great if you didn’t have to pay sales tax on these items throughout the whole year. Unfortunately, that is not the case. Consumer sales taxes remain a very important income source for nearly all states. As a result, the governments in these states only put these targeted sales tax exemptions in place during limited times of the year, often just a few days. As many students go back to school in August, many states, such as Alabama and New Mexico, offer a holiday around this time of the year. This year, for example, it’s August 5 -7. This is also a prime month for hurricanes to strike the South and East Coasts, making it timely for states to have holidays this time of year too. Various other states, like Alabama, Missouri and New Mexico, administer tax holidays at other times of the year, such as February, April and November.

Tax holidays seem like a good thing (for consumers), but recently policymakers have been reevaluating them. Rather than providing a valuable tax cut or a boost to the economy, sales tax holidays impose serious costs to consumers and businesses without providing offsetting benefits. From a business standpoint, imagine having to properly account for all items which are temporarily subject to the holidays versus those that are not. It is the seller’s responsibility to get that right in multiple states. What a compliance headache! As a result, the number of states participating in state tax holidays are decreasing. Eighteen states, primarily in the southeastern portion of the country held state tax holidays in 2015, down from a peak of 19 in 2010.

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.