Sales tax holidays jump the shark — Wacky Tax Wednesday
Is it just me, or are sales tax holidays becoming a bit absurd?
Sales tax holidays usually have a certain hectic feel to them, even when you know they’re coming. And although retailers generally welcome sales tax holidays because they encourage customers to shop, they come with heavy compliance burdens.
For example, retailers need to determine which products qualify for the temporary exemption, program point-of-sale (POS) systems accordingly — accounting for price caps and restrictions — and ensure employees and systems recognize the rules for layaway sales, rainchecks, and shipping and delivery fees. Then they have to return all systems to normal until the next tax-free period rolls around.
So, sales tax holidays always mean more work for retailers. But lately, some states are taking sales tax holidays to another level. Merriam-Webster defines absurd as “ridiculously unreasonable.” It fits.
Florida pushes retailers to the brink
Last year, Florida’s “Freedom Week” provided a temporary exemption for the first $25 of the sales price of swimming masks, the first $50 of the sales price of camping stoves, and the first $300 of the sales price of paddleboards. The list went on, becoming ever more farcical: The first $5 of the sales price of bait or fishing tackle sold individually, but the first $10 of the sales price of bait or fishing tackle sold together.
It’s common for states to cap the price of qualifying items and to tax products priced higher than the cap. But to exempt the first portion of the sales price, and to have about 25 different price thresholds for a wide array of products? I’m surprised Florida retailers didn’t simply hang a “Gone Fishing” sign on their door (and website) until the holiday passed. But I guess they didn’t, because Florida’s doubling down on the sales tax holiday madness this year.
In 2022, Florida will have a slew of overlapping tax-free periods that exempt certain children’s books, certain children’s clothing, and a host of other items with varying price caps. Like last year, retailers sometimes will have to program POS systems to exempt the first $35 of the sales price of pool floats, the first $200 of the sales price of tents, and so forth. They’ll also have to ensure they don’t exempt sales of clothing intended for children aged 6 and up during the yearlong sales tax holiday for children’s clothing that begins July 1, 2022 — unless the transaction occurs during the 2022 back-to-school sales tax holiday, when there are price restrictions on qualifying clothing, but no age limits.
Perhaps as an homage to Tim Allen’s fictional home improvement show, Tool Time, Florida is also offering a “Tool Time” sales tax holiday this year. Eligible items include hand tools selling for $50 or less per item. So, while a laser tape measure selling for $49.99 would be exempt during the tax-free period, a home toolkit selling for $54.99 would be taxable. This is different from the exemptions provided during Freedom Week, when, as noted above, businesses may need to exempt a portion of the sales price.
Such requirements add additional layers of compliance complexity and can be particularly hard to manage for small businesses with few resources to devote to sales tax compliance.
Other states encumber sellers in other ways.
Illinois puts retailers in a bind
For example, during an upcoming 10-day sales tax holiday in Illinois, the state sales tax on qualifying items drops to 1.25% from 6.25% (local sales taxes still apply). Retailers must file a Schedule GT, Sales and Use Tax Holiday and Grocery Tax Suspension Schedule along with their normal sales tax returns, and use the Schedule GT to “calculate a credit against the tax reported … for the tax they are not collecting during the state sales tax holiday.” See this Department of Revenue Information Bulletin for more details as well as a list of qualifying items (some of which are subject to a $125 price cap).
A note about qualifying and nonqualifying items: Illinois’ temporary exemption applies to certain school supplies “used by students in the course of study” but it does not apply to school supplies “not used by students in the course of study.” It’s kind of like Florida’s exemption for clothing “primarily intended for children age 5 or under.” Whenever I see such requirements, I wonder whether a retailer will ask consumers about their intended use. After all, Illinois residents with no students at home might be tempted to purchase some new pens or scissors tax free. Florida parents might be tempted to purchase a shirt, tax free, for a petite 7-year-old. These are curious requirements that could put the retailer in a predicament.
Even the most straightforward sales tax holidays are a lot for retailers to juggle, and government or tax officials sometimes compound the difficulties by making last-minute changes.
Puerto Rico keeps retailers guessing
For example, Puerto Rico’s new sales tax holiday for hurricane preparedness supplies, enacted May 6, 2022, tasked the Treasury Department with announcing the dates for the annual tax-free period by May 1 each year. The law specified that the holiday would be held the last Friday in May through the following Sunday in the event the Treasury Department failed to identify dates for the tax-free period, as required.
Since the Treasury Department could not provide dates by May 1 for an event created on May 6, retailers were left hanging. They knew there’d be a tax-free period, but they didn’t know when. With no other information to go on, many assumed it would start May 27, 2022.
On May 25, 2022, two days before the tax holiday was presumed to start, the Treasury Department pushed its start date back to June 17, 2022. This was a last-minute change of the best sort — it’s more common for sales tax holidays to be sprung on retailers — but it still caused a scramble.
Because, here’s the thing: For most retailers, making all the changes needed to comply with a sales tax holiday takes more than flipping a switch.
There’s more to sales tax holidays than flipping a switch
Businesses that manage sales tax manually may feel like they’re up the proverbial creek without a paddle (which they buy without sales tax in Florida during Freedom Week if it costs $75 or less). Successfully navigating a sales tax holiday’s requirements takes an inordinate amount of work for retailers.
Even businesses that have implemented automated sales tax solutions can find compliance to holiday rules challenging — especially when states establish a new holiday, as Florida, Illinois, and Puerto Rico have done this year. Retailers must map their inventory to tax codes created specifically for a given holiday. This is followed by testing the new codes to ensure they’re correct and fully functioning before the holiday begins.
The good news for businesses working with an experienced sales tax solution provider like Avalara is that they know they don’t have to go it alone. Learn more about the benefits of automating sales tax compliance.
It’s here — Read Avalara Tax Changes 2023
Review tax updates and trends, plus get a forecast of what’s to come
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.