Massachusetts sales tax holidays can’t last forever – Wacky Tax Wednesday

Once or twice in my life, a retailer has generously offered me a sale price before or after a sale event. They’re allowed to do it (it’s their profits), and it delighted me. What they can’t do is waive the sales tax unless the transaction takes place during a sales tax holiday.

But can they manipulate a transaction so that it appears to have occurred during a holiday, even if it didn’t?

A few years back, one savvy retailer in Massachusetts came up with a clever way to save customers the tax on items purchased before a sales tax holiday. And recently, the Massachusetts Appeals Court decided the retailer’s actions were OK. Here’s what happened.

Massachusetts used to offer one-time sales tax holidays rather than a recurring, annual tax-free period. Every year, lawmakers examined the commonwealth’s coffers and decided whether to offer a sales tax holiday. They usually ended up providing a generous tax-free period, exempting most items priced less than $2,500 — but often they waited until the last minute to do so.

The savvy retailer in question sells furniture, so the 6.25% sales tax can add up. Upon learning there would be a sales tax holiday in 2010, the retailer used software to cancel orders made and paid for (but not yet delivered) in the weeks leading up to the tax-free event. The software then rewrote the orders during the sales tax holiday, making the sales eligible for the sales tax exemption. Clever, indeed.

According to the Massachusetts Department of Revenue, “All of this was done generally without the customer contacting or patronizing the Taxpayer during the Holiday.” Customers must have been thrilled to save the tax on items purchased days, weeks, or perhaps months before the sales tax holiday itself. The tactic must have been a hit because the retailer replicated it in 2011 and 2012.

Then the Commissioner of Revenue got involved, holding the retailer liable for millions in uncollected tax.

The retailer appealed, of course, and won. The Appeals Court found that "payment in full occurred during the Holiday because the Taxpayer's software applied a credit (from the payment toward the customer's prior order) to the customer's new order during the Holiday. Further ... the transactions at issue were not prior sales, but rather prior orders subject to cancellation at any time prior to the delivery.” Point for the savvy retailer.

Alas, the game can’t continue because the Massachusetts Legislature created an annual sales tax holiday, effective August 2019. Consumers no longer need to worry they’ll blink and miss the opportunity for substantial sales tax savings. Retailers no longer need to scramble to change point-of-sale systems at the last minute. But there’s a trade-off: Our savvy retailer can no longer shuffle orders to save customers the sales tax outside of the days of the tax-free period.

The annual sales tax holiday statute specifies that “transactions where a deposit, prepayment or binding promise to pay is made before the designated days” are ineligible for the sales tax exemption.

In addition, the Commissioner of Revenue created a regulation that provides the following: “Any transaction where a purchaser places an order and makes a deposit, prepayment or other binding promise to pay for an item of tangible personal property prior to the sales tax holiday is not eligible for the sales tax holiday exemption. A vendor may not re-book a prior sale that has taken place before the sales tax holiday, either manually or by use of software, in order to cause the prior sale to be eligible for the sales tax holiday exemption.” It’s unequivocal.

I don’t know how the retailer feels about not being able to provide sales tax savings to customers who order furniture prior to the sales tax holiday. Returning customers who benefitted from that practice in the past are probably bummed.

Automating sales tax is the best way to manage collection and remittance, during sales tax holidays and the rest of the year. Learn why.