How states and businesses can improve sales tax holiday compliance

States demand a lot from businesses when it comes to sales tax — tax revenue that wouldn’t exist without the businesses responsible for collecting and remitting it. The entire administration of sales tax falls on businesses. Perhaps nowhere is that more evident than with sales tax holidays.

• A majority of small and midsize businesses surveyed by Censuswide in August 2024 find it difficult to comply with sudden tax holiday changes, struggle to make a profit due to sales tax holiday complexities, and spend at least $10,000 annually preparing for sales tax holidays.
• Top tax holiday compliance challenges for retailers include making sense of unclear rules, ensuring each state’s requirements are met, and accounting for last-minute tax holiday changes.
• Businesses can ease the pain of sales tax holidays by using tax research solutions and automating sales tax compliance.
• States can lessen the compliance burden of sales tax holidays by giving retailers proper notice, applying exemptions uniformly to state and local sales taxes, and publishing comprehensive state tax guidance.

With close to 20 sales tax holidays scheduled for July and August, the 2025 sales tax holiday season is in full swing. This is a heady time for consumers eager to take advantage of tax savings. Yet for retailers, sales tax holidays are more of a mixed bag: Tax-free weekends may increase sales; they almost certainly increase the sales tax compliance burden.

By suspending sales tax on certain products for a time, sales tax holidays save consumers tax dollars. Yet according to a survey conducted in August 2024 by Censuswide, sales tax holidays often cost small and midsize businesses.

Both businesses and states can take steps to mitigate the compliance burden for retailers.

Censuswide surveyed 500 operations and/or finance professionals at small and midsize U.S. retailers. Here are the top five sales tax holiday challenges reported by the respondents:

1. 73% of the retailers have difficulties complying with sudden tax holiday changes.
2. 60% struggle to make a profit due to sales tax holiday complexities.
3. 58% spend at least $10,000 annually preparing for sales tax holidays.
4. 57% have to hire temporary staff to handle the increased demand.
5. 53% pay their employees overtime during sales tax holidays.

The effect of sales tax holidays on the bottom line can be another difficulty for retailers. While 32% of the businesses surveyed saw sales increase during a sales tax holiday, another 32% merely broke even, and 27% lost money during tax holiday events.

Sales tax holidays may not be as much of a compliance burden for businesses that have automated sales tax collection, remittance, and reporting. But businesses that manage sales tax manually, without the help of sales tax automation software, likely spend valuable time and resources on sales tax holiday compliance.

The biggest tax holiday compliance challenges for retailers include:

• Making sense of unclear rules
• Ensuring each state’s requirements are met
• Accounting for last-minute tax holiday changes

Making sense of unclear rules  

A lack of clear guidelines is one pain point. Though state tax departments usually have robust sales tax holiday resources that answer many questions a business might have, the laws themselves sometimes leave room for doubt.

Per the Texas Comptroller, backpacks with wheels and messenger bags qualify for the Texas back-to-school sales tax holiday. But the Maryland Comptroller doesn’t say anything about wheels or messenger bags as it relates to the Shop Maryland tax-free week, likely because the sales tax holiday legislation doesn’t say anything about wheels or messenger bags. 

So, would a wheeled bag that qualifies for the Texas tax-free weekend also qualify for the Maryland sales tax holiday, if the price were right? And how would a business know?

“The only way a business could be sure they were in compliance with state law before the days of tax information services was to write a letter to the state,” says Scott Peterson, VP of Government Relations at Avalara and former Director of the Sales Tax Division at the South Dakota Department of Revenue. “It was not unusual in those days for a business to spend thousands of dollars and weeks of time trying to get an answer from states.”

Imagine having to go through that process for every state with a sales tax holiday.

Ensuring each state’s requirements are met

The fact that sales tax holiday requirements vary from state to state is another challenge for retailers. 

During Maryland’s August tax holiday, only the first $40 of a qualifying backpack is exempt from sales tax; any amount over $40 is taxable. That’s quite different from the Texas tax holiday, when the full cost of qualifying backpacks priced less than $100 is tax free. 

Time zones can be another sticky policy wicket. During the South Carolina sales tax holiday, what the clock reads in South Carolina governs the start and end of the tax-free event. In states that are members of the Streamlined Sales and Use Tax Agreement (SST), it’s the time at the seller’s location. 

With issues like these, it’s no wonder the survey found that:

• 26% of small and midsize businesses struggle with rules and exclusions
• 24% say the rules are hard to understand

Accounting for last-minute tax holiday changes

Even the most assiduous tax department can’t do much to shield taxpayers from pain caused by last-minute sales tax holiday changes. 

Though most sales tax holidays are recurring events that vary little from year to year, in several states, sales tax holiday legislation must be introduced annually. Some years, in some states, sales tax holiday legislation isn’t enacted until shortly before the tax holiday starts: Both Florida and Massachusetts have announced sales tax holidays just a day or two before the beginning of the event. (Those retailers had a taste of what many importers have experienced recently with tariffs.)

Last-minute tax holiday changes normally occur because the legislature has trouble making up their minds. Nevertheless, except in rare instances where sales tax holiday participation is optional, retailers must comply with all sales tax holiday rules. Thus, this Censuswide finding:

• 73% of retailers have difficulties complying with sudden sales tax holiday changes

How businesses can improve sales tax compliance

Many of the businesses surveyed by Censuswide lack dedicated tax compliance teams, and 26% of the respondents still manage sales tax holidays manually. There are steps they can take to improve their sales tax holiday compliance.

Bookmarking the Avalara Tax Desk annual sales tax holiday blog post or a similar resource can help retailers stay on top of the tax-free events offered by upwards of 20 states in 2025. Using a solution like Avalara Tax Research, which provides updated transaction tax rules, rates, and regulations, can also help businesses stay in the know.

Retailers tasked with complying with numerous sales tax holidays may want to consider implementing cloud-based sales tax software. Avalara AvaTax helps businesses comply with sales tax holidays in the states where they’re registered. AvaTax accounts for sales tax holidays; customers need only make sure their products are mapped to the correct Avalara tax codes. Visit the Avalara Knowledge Center for more details.

While it’s each taxpayer’s responsibility to know about tax laws and comply with them, states can also do more to ease the compliance burden for businesses.

To lessen the strain tax holidays place on businesses, states could follow SST guidance:

• Give proper notice (60 days prior to the first day of the calendar month in which the holiday will begin).
• Apply the exemptions uniformly to state and local sales taxes.
• Publish comprehensive state tax guidance. 

SST was created to reduce the burden of tax compliance for businesses and governments alike. The 24 member states must adhere to the agreement, but nonmember states are welcome to follow SST state tax guidance as well. Adopting the policies listed above would go a long way toward reducing sales tax holiday pain points for retailers.

Another way for states to help businesses maintain sales tax compliance is to implement sales tax technology solutions that 1) make it easy for taxpayers to fulfill their tax obligations, and 2) support the government teams that administer those tax obligations.

Avalara for Government offers just that. Our tax automation for governments can help jurisdictions decrease delinquency, increase remittance accuracy, and improve regulatory processes while simplifying laborious operations for taxpayers. Avalara uses automation expertise and cloud-based solutions to meet the complex tax management needs of government agencies.

Sales tax holidays have been around for decades despite their toll on businesses and the bite they take out of state and local sales tax collections (more than $1.3 billion in lost revenue in 2024 alone). And with more than 30 sales tax holiday bills introduced in 2025, tax holidays seem here to stay.

The easier it is for businesses to comply with sales tax holidays and other sales tax laws, the more likely they are to do so. That’s in everyone’s best interest, a win-win.

Learn more about how Avalara can help improve tax compliance for both taxpayers and government agencies by visiting our website, avalara.com.