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.
As we enter the thick of sales tax holiday season, 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.
A sales tax holiday is a limited-time period – typically running for three 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 to encourage consumer spending.
A lot of controversy surrounds sales tax holidays as to whether they are effective tax policy or if they even encourage consumer spending. However, this hasn’t stopped several states from using sales tax holidays as a way to demonstrate they are providing tax relief to consumers or promoting economic growth.
Several types of sales tax holidays take place throughout the year and generally fall under five different categories:
August sales tax holidays are usually tied to back-to-school shopping. Sixteen states are holding back-to-school sales tax holidays in 2021.
Severe weather preparedness tax holidays usually happen earlier in the year, around hurricane season, in coastal states.
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 and 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.
There are numerous administrative issues that sales tax holidays create for retailers. Make sure to read your state’s regulations closely to ensure you tweak your sales tax application and calculation processes correctly during the sales tax holiday.
Out-of-state retailers or 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. However, watch for quirks. In Ohio and West Virginia, the time zone of the seller’s location determines the authorized time period for the sales tax holiday when the purchaser is located in one time zone and the seller is located in another.
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.
The rules for layaways and returns 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.
Coupons fall into two general categories: retailer’s coupons and manufacturer’s coupons. The type of coupon a consumer uses to make a purchase can affect the tax base, or the price the sales tax is applied to.
Retailer’s coupons are provided directly by the retailer to reduce the sales price. Sales tax is charged on the discounted price after the retailer’s coupon is applied. Manufacturer’s coupons reimburse the retailer for the discount provided on an item and generally do not reduce the amount of sales tax paid by the consumer. Since the retailer is compensated, sales tax is charged on the full sales price.
During sales tax holidays, keep in mind the dollar amount threshold for qualifying items. In many states, if the retailer’s coupon reduces the price of an item to less than the threshold amount, then the item qualifies for the exemption. Discounts provided to customers via a manufacturer’s coupon do not reduce the sales price in determining whether an item is eligible for the sales tax exemption during a sales tax holiday.
Watch out for state-by-state rules on how delivery and shipping charges are handled in determining whether an item qualifies for the sales tax exemption during a sales tax holiday.
For Missouri’s back-to-school sales tax holiday, the sales tax holiday thresholds include mandatory shipping and handling charges as a part of the total purchase price of holiday-related items, so the charges could cause an item to exceed the dollar amount threshold.
During Maryland’s Tax Free Week, delivery or shipping charges that are separately stated are not included in the sales price to determine if an item is eligible for the holiday or not. However, a combined shipping and handling charge is legally considered as part of the sales price of an item, even if the combined charge is separately stated.
You must also know how tax is applied if you are shipping an order that is a mix of exempt and taxable items. During Ohio’s back-to-school sales tax holiday, if all items in a shipment are exempt under the sales tax holiday and fall under the dollar amount threshold, then the shipping and handling charges are not taxable. However, if the shipment includes both exempt and taxable items, then the retailer should allocate the shipping and handling charges by a percentage based on the total price of the taxable items compared to the total price of the entire shipment. Tax would be charges on the portion of the shipping and handling charges allocated to the taxable items.
Sourcing in sales tax is all about which jurisdiction’s tax should be applied to sales retailers make. When a purchase is made in-store and the customer takes possession of the item, the applicable sales tax rate is based on the store’s location.
Sometimes, a customer may request that a retailer ship their purchase to their home instead of taking it home from the store themselves. This is called a “send sale”. In most states, the sales tax on a send sale is applied at the destination – the place where the purchaser takes control of the goods.
West Virginia specifies that for their sales tax holiday, out-of-state customers that order from West Virginia online or thorugh mail or phone are not eligible for the sales tax holiday, because sales tax is determined based upon the destination of the sale, and not where the sale originated.
You must determine sourcing rules as they apply during a sales tax holiday on a state-by-state basis.
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).
Sales tax holidays can also be enacted as one-time occurrences. For example, a couple states have pushed through legislation for one-time sales tax holidays in reaction to the economic impact of the pandemic. Louisiana held a sales tax holiday last fall to provide relief for Louisiana residents recovering from hurricanes Laura and Delta and the COVID-19 public health emergency. Tennessee just held a sales tax holiday July 30-August 5, 2021 aimed at boosting food sales at restaurants struggling due to the pandemic.
No matter whether you are a seller or purchaser in one of the states holding a sales tax holiday in 2021, 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 participating state.