In this 90-minute live webinar, sales tax expert Diane Yetter will teach you the right way to handle some of the most important sales tax administrative items.
Early August means it’s sales tax holiday season for many states. The upcoming holidays are considered “back-to-school” holidays since they include school supplies, calculators, and backpacks as tax-exempt items. But many of the early August sales tax holidays are much broader, including a wide range of items that can be purchased tax-free.
With sales tax holiday season right around the corner, now is a good time to take a look at how sales tax holidays work, examine the different types of tax holidays that states offer, and get information on the upcoming holidays starting in the next week.
A sales tax holiday is a limited-time period – typically running for 3 days but sometimes up to a week – where a state allows purchases of specific items to be made tax-free. States typically offer sales tax holidays in order to encourage consumer spending. There is a lot of controversy with sales tax holidays and whether they actually are good tax policy or even encourage consumer spending. But that hasn’t stopped some states from using the holiday as a way to demonstrate they are reducing taxes.
August sales tax holidays are usually tied to back-to-school, and this time of year is when the vast majority of tax holidays take place. Fifteen states are holding back-to-school sales tax holidays in 2018. Louisiana was scheduled to have a back to school holiday but in the budget bill, all future holidays in the state were eliminated. But tax holidays take place throughout the year and there are five different categories that they fall under:
Severe weather preparedness tax holidays usually happen earlier in the year, around hurricane season. The other types of holidays can take place throughout the year.
If you check out our Sales Tax Holiday Chart, you’ll notice that the state will almost always place a threshold on the dollar amount for qualified items. For example, clothing and footwear purchases are frequently capped at less than $100 per item, meaning that any clothing or footwear item over $100 cannot be purchased tax-free during the holiday.
Many states also will exclude specific items from a category of tax-exempt purchases that can be made during a sales tax holiday. For example, New Mexico exempts purchases of clothing and footwear less than $100 per item during the holiday, but excludes accessories, athletic or protective clothing or footwear from the exemption.
Also keep in mind that sales tax holidays frequently exclude purchases made for businesses. For example, Alabama’s tax holiday specifically excludes purchases made for commercial use. Wisconsin’s sales tax holiday includes computers and school computer supplies but only if they are purchased for the consumer’s personal use.
In an interesting wrinkle, this year New Mexico enacted a new “small business tax holiday” for 2018 and 2019 for items purchased from small businesses. The new holiday will take place on November 24, 2018, and only businesses that employed no more than 10 employees at any one time in the prior year can offer the sales tax holiday.
Massachusetts has offered a broad sales tax holiday for all goods costing less than $2,500 for a number of years under holidays that were required to be enacted annually. The holiday often was not approved until days before the effective date. This year, a permanent holiday was signed into law that will begin in 2019.
Sellers should keep in mind that special rules apply to items such as layaway sales and returns during sales tax holidays. The rules can vary by state so be sure to check the state’s rules before the holiday begins to know how to handle these situations should they arise.
With layaway sales, eligible items frequently qualify for the exemption if the customer takes delivery of the merchandise during the exemption period or puts the merchandise on layaway during the exemption period, even if final payment and delivery is not made until after the sales tax holiday.
If a customer returns an eligible item purchased during the sales tax holiday exemption period, the retailer should refund tax only if the customer produces a receipt or invoice showing tax was paid on the item, or the retailer has sufficient documentation to show that tax was paid on the specific item.
Online sellers who are registered to collect tax in a state that has a sales tax holiday must also comply with the holiday provisions. In these situations, applying the rules for transactions that occur at the beginning and ending of the period must follow the specific state’s time zone. Although the Wisconsin 2018 holiday specifies that the time zone of the seller’s location determines the authorized period for the exemption.
When states enact sales tax holiday legislation, they most often set them up as annual holidays. This means that the holiday takes place every year at the same time (e.g. the first Friday through the first Sunday of August). But sales tax holidays can also be enacted as one-time occurrences.
Wisconsin recently enacted a one-time sales tax holiday taking place August 1-5, 2018. It’s a typical back-to-school holiday, including clothing, computers, school computer supplies and school supplies. Wisconsin’s legislation includes information on how to handle layaway sales, rain checks and discounts. Additional information is available on the Wisconsin DOR website.
Whether you are a seller or purchaser in one of the states holding a 2018 sales tax holiday, you should be aware of when the holiday is taking place, what items are included, and how to handle the administration of the holiday. To stay up-to-date on sales tax holidays, visit our Sales Tax Holiday Chart, which has dates, qualifying items, and helpful information for each state that is participating.