Sales Tax Holidays - What a great break!
Several years ago, I started tracking these holidays and doing an annual column on them for MarketWatch.com. They sound like a wonderful break for taxpayers, especially when it comes to buying all those back-to-school supplies, don't they?
Here's the current list:
Let's see how great this really is, beyond the hype. OK?
How much money can the typical household really save on those before school purchases?
If they spend $500 per year, at a sales tax rate of 8%, that saves them $40 per year.
For a family where cash is really tight, that can mean being able to pay the monthly utility bill without scrounging for funds.
For everyone else, it's insignificant. The way people spend money on impulse purchases and designer sneakers, $40 savings in a whole year isn't much.
Of course, if you add in the purchase of a computer for $1,000 - that could bring the sales tax savings up to $120.00. Now we're talking. (Or look at Missouri, where they will allow up to $3500 for computers. Their sales taxes range from just under 5% to nearly 7.5% depending on the county.)
Then you add in the savings some states offer on going 'green', with sales taxes waived on energy-savings installations of up to $1500 - that could add another $120 to the savings.
As a consumer, working your way through the maze of tax holidays offered by your state, you could save an overall average of $10-$25 per month. As long as you spend over $300 per month to achieve that savings.
What about tax professionals and retailers - how do these holidays affect us?
For retailers, this is a huge burden. It involves re-programming their entire point of sale system to change the sales tax rate on several (or several hundred, or thousand) affected items. And then programming the system back at the end of the sales tax holiday. It means making these changes separately for stores in different counties, or even perhaps different cities! It means having extra staff people on hand to audit the system to make sure there were no major errors in over/undercharges. And the looming threat of a state sales tax audit to see if they handled the sales tax charges correctly.
For tax professionals, working with our active retail clients, it means a great deal of extra review of sales figures for a weekend's or a week or two's transactions, once or twice a year. Extra reconciliations to make sure your client isn't penalized for over/undercharging sales taxes. It means at the end of the year, you can't just multiply the tax rate by total sales as a math check to see if total sales tax expenses are close to what they should be.
When I first started writing the articles, I spoke with retailers and tax professionals - they hated the process.
If the process is so onerous, is it really worth going through? Do these promotions really increase sales, over the sales that would have been made without the sales tax holidays? The retailers tell me they don't significantly increase their sales.
Perhaps it's a boon for Energy Star-type sales in those few states that have those tax holidays? I don't know. But, coupled with IRS and/or state tax credits, the savings might be significant in that product range.
Are you in a state with sales tax holidays? We'd love some feedback from you about how effective they are vs. the costs involved. And of course, does dealing with extra work earn you a lot of extra money?
Thanks for your feedback!
Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.