State Sales Tax Holidays Are a Massive Burden for Retailers

When back-to-school season started, you likely saw an uptick in advertisements for school supplies and new clothes. The time of year coincides with a related event that happens in states across the country: sales tax holidays.

Imagine that you’re a retailer going about your business, when suddenly a state sets a short time period during which some of your goods are exempt from sales and use tax. You now must figure out how to stop—and then restart— sales tax collections on some transactions.

The Federation of Tax Administrators notes that 19 states have hosted sales tax holidays in 2023 for items including school supplies, disaster preparedness, and certain foods.

Politicians and your marketing team say sales tax holidays are a great way to grow sales, stimulate the economy, and help residents get ready for school or natural disasters. But they’re not a walk in the park for retailers.

Holiday Rationale

According to the National Association of State Budget Officers, most states ended fiscal year 2023 with a surplus. In response, many governors and legislators took the politically popular option of adding or expanding sales tax holidays.

From the state’s perspective, such holidays are a practical way to reduce a surplus because they’re easy to implement—the only administrative cost is explaining to retailers how it works.

In addition to giving taxes back to consumers, sales tax holidays act as a policy maneuver to influence behavior. Florida and Texas hold tax-free periods for emergency preparedness items to encourage residents to prepare for natural disasters. Maryland helps residents save on energy costs while promoting sustainability through its annual sales and use tax-free period on energy-efficient appliances.

Holiday Headaches

State tax holidays force retailers to update their point-of-sale systems so they don’t apply that tax to qualifying transactions. Turning tax off and on can require changes to hundreds of products. It can be complicated even for businesses that only sell the type of product subject to a holiday, such as children’s clothing or sporting goods.

To ease the burden, the Streamlined Sales Tax Governing Board created four categories of definitions their member states must use. But that didn’t necessarily simplify things—disaster preparedness can include as many as 40 products across the five definitions that the governing board created.

Back-to-school holidays are complicated because they often cover school supplies and clothing, which include a vast number of products. They can require changing the tax application for more than 100 different clothing products, nearly 100 different school supplies, and dozens of computers and related technology supplies.

In addition, some states exclude clothing used in a business or a trade, meaning that retailers must be able to tax or exempt items based on whether they’re a B2B sale or a B2C sale.

Multiply all those products, plus the few needed for Second Amendment holidays, times the number of states with holidays, and you get over 125,000 products with rules for all sales tax holidays each year. Remarkably, most of that count comes from the authority Alabama gives to its counties, cities, and police jurisdictions to be different from the state. Alabama’s back-to-school holiday normally requires over 80,000 rules.

Life became especially difficult for retailers in Florida this year due to the short notice of the state’s 2023 disaster preparedness sales tax holiday. That holiday started on May 27, just one day after Gov. Ron DeSantis (R) signed the corresponding bill into law. Retailers with ample resources and employees dedicated to tax may be able to handle a quick response, but resource-strained businesses often must scramble to ensure they remain compliant.

Knowing what’s exempt is just the beginning of the challenge, as states commonly set thresholds or price caps for sales tax holidays. This can be as simple as programming systems to exempt clothing priced $100 or less and tax clothing priced above $100, or as onerous as the Florida Freedom Holiday, which exempts a portion of the price of myriad outdoor entertainment products but taxes the additional cost.

For retailers that sell in multiple states, sales tax holidays are an increasingly common pain point, because the particulars of each tax-free period vary. A tax-free weekend in Arkansas exempts cosmetics, handbags, jewelry, wigs, and athletic uniforms, but these items remain subject to tax during a sales tax holiday in Connecticut and Iowa.

Tax-free weekends in all states tend to create a compliance burden. It’s hard to imagine the complexity for retailers that haven’t automated their sales tax. Calculation errors are a frequent problem in state audits, and that burden depends on how well a retailer has updated their point-of-sale systems to account for every temporary sales tax rule.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Scott Peterson is vice president of US tax policy for Avalara.

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