Historically, the first sales tax holidays started in the Southeast U.S. — hurricane-related holidays to incentivize people to prepare themselves for heavy weather events, under the premise that impacts of hurricanes would be lessened if residents were better prepared.
Sales tax holidays then expanded into back-to-school sales, starting pre-Labor Day in late July through early August. These holidays were built around the fact that they were great politics at a time of approaching elections and were great for retailers. This bolstered a weekend when people would be spending money anyway, getting ready for the school season.
But with the main sales tax season just ending, it's worth noting one major challenge that comes along with them, according to Scott Peterson, vice president of U.S. tax policy and government relations at Avalara: "States don't administer sales tax, retailers do. States simply make an announcement — the real change happens in the cash register."
Avalara conducted a survey to quantify the burden for 500 businesses in the midst of ever-expanding sales tax holidays. "We queried operations and finance professionals in the middle of August, with questions around the operational side of sales tax holidays," Peterson said. "We asked, 'What does it take to do that work? How did holidays impact them? What did it cost to administer a sales tax holiday?'"
One-third of retailers said sales tax holidays are a logistical nightmare, with 32% responding that they only broke even at sales tax holidays due to personnel and other expenses, while 27% lost money after investing in new resources. A total of 41% of retailers made more money than it cost to prepare for the holiday.
Meanwhile, 57% needed to hire additional staff for sales tax holiday crunches, and 27% said the biggest challenge is the financial burden it puts on the business.
"The challenge is that retailers sell multiple products," Peterson said. "Home Depot, for example, sells some goods that would seem to qualify for back-to-school. For instance, is a work shirt something a parent would buy their child for back-to-school? Home Depot sells pads, pens and pencils. What qualifies? A larger retailer might need to go to their state department of revenue to get clarity on the correct course of action."
A good example of this complexity is Florida — they have eight sales tax holidays this year, including back-to-school holidays twice a year for a week each time.
"What really causes complexity is the lack of adequate notice of upcoming holidays," Peterson observed. "Florida has a one-month Freedom Tax Holiday in July, exempting around 30 different types of products — for example camping supplies such as tents, chairs, sleeping bags, stoves, lanterns, flashlights, and so forth. Each product type has a separate dollar limit."
As tax director of South Dakota, Peterson noted that retailers were often opponents of proposed sales tax holidays. "This was in the 1990s, and rudimentary cash registers were the norm, typically leased from companies that had to make changes to the cash registers. It could cost a retailer $3,000 to bring the leasing company in to make changes to cash registers for a single weekend."
Adequate notice is considered 60 days, which is often not the case on the ground with state changes to existing sales tax holidays or introducing new holidays. But this year, Avalara received three days' notice of a new Florida sales tax holiday and had to make rapid system changes.
"State departments of revenue need to decide on, for example, what constitutes a weekend," said Peterson. "They then need to agree on product categories and dollar limits on products. And sales clerks and point of sale systems need to be aware of and updated for tax free items at the point of purchase."
The states vary widely in their approach to exempting items for the holiday, according to Peterson.
"In Iowa, only clothing and footwear are included," he explained. "But in Florida, back-to-school tax holidays involve a long list of eligible items. For Walmart, operating across states, their computers need to reflect specifics of each sales tax holiday in each state. And sophisticated shopping cart systems need to have each item mapped for the correct sales tax rate, integrated with back-end sales tax software. These holidays represent a big expense for retailers."
