Online Seller's Guide to Sales Tax Holidays
- August 5, 2016 | Ryan O'Donnell
As an online seller, how are you affected by sales tax holidays? And what are they?
In participating states, a sales tax holiday is a limited period of time where consumers are permitted to purchase qualifying goods tax free.Typically, sales tax holidays (also referred to as “tax-free weekends”) coincide with one of three events: back to school, energy efficiency, and hurricane preparedness.
Sales tax holidays started in 1997 when, in an attempt to keep residents buying in-state, New York made clothing purchases tax-free to help prevent residents from crossing the border to New Jersey where clothing is, by law, sold tax-free.
Check out our interactive sales tax holiday infographic.
What Online Sellers Need to Know
Managing sales tax is already complicated and time consuming. Adding tax holidays only compounds the complexity. To help ease the burden, we recommend businesses consider the following questions to get started.
1. Am I impacted?
It’s important to understand where your goods have the potential to be purchased and where sales tax holidays are taking place. It’s possible there is no overlap and you’re in the clear.
To make matters more complex, some states allow local municipalities to opt-out of sales tax holidays. Missouri is a good example where a limited number of cities will be collecting sales tax while not collecting state-level sales tax on qualifying goods. If you’re strictly an online seller, you may be able to opt-out altogether. Check with the state DOR to determine qualifications for opting out.
2. Are my products impacted?
If you’ve identified that you sell goods in states where sales tax holidays are happening, the next thing to understand is whether you are selling qualifying goods. Sales tax holidays only apply to specific products such as school supplies, energy efficient appliances, and disaster preparedness items during the designated dates.
Even if you do sell goods that qualify for tax exemption, you may still be able to opt-out if these goods make up a small percentage of your total sales. Florida is one state where this option is permitted.
3. Can my ecommerce platform or marketplace help?
Now that you know you are selling qualifying goods in states where sales tax holidays are scheduled, it’s time to craft a plan for managing tax collection. If you, like many online sellers, are an Amazon seller, you’re in luck! The Amazon sales tax collection solution knows all about sales tax holidays and can help you automate appropriate tax exemptions.
Amazon provides very limited guidance on how sellers should handle sales tax holidays. Let’s discuss your options below.
Sales Tax Holidays - The Amazon Way
If you are an Amazon seller, you may wonder how you can handle these limited tax-free periods. Fortunately, the technology that collects sales tax on Amazon purchases understands tax holidays and can adjust the tax rate to accommodate these events.
It’s important to recognize sales tax holidays do not equate to tax exemption on all purchases. Back to school tax holidays, for example, limit the tax break to school related items such as clothing, footwear, computers, and school supplies.
For Amazon to properly limit sales tax collection on the goods you are selling, it needs information on the type of products you are selling. This can be accomplished by setting appropriate product tax codes.
A good example is school supplies. Amazon offers the product tax code, “A_SCHL_SUPPLS” sellers can attach to such goods. With this, Amazon is able to properly turn off sales tax collection for buyers in states offering a back-to-school sales tax holiday.
Sales Tax Holidays - Other Selling Platforms
What should you do if you are selling on other platforms or marketplaces such as Shopify, Etsy, or eBay? Not surprisingly, most ecommerce platforms can’t do what Amazon can do. That puts the seller in the uncomfortable position of having to manage these tax-free events themselves. There are several options merchants can take.
Shopify, for example, recommends sellers, “export your products and edit the CSV file and adjust the taxable status for any eligible items.” For larger sellers, this can be an extremely time consuming task. Moreover, it doesn’t allow sellers to limit the tax exemption to specific states and cities.
It turns out there is another approach. Many of the popular ecommerce platforms allow sellers to create specific groups of products and apply tax overrides. Thunder::tech has posted an approach to their blog that walks Shopify and BigCommerce sellers through how to accomplish this.
If you are on a platform that offers no options for product grouping and custom tax rates, here are some other potential options.
Option 1: Ignore the Tax Holiday
While not recommended, choosing to ignore tax holidays and collect tax as usual is an option. Retailers should be careful, however. Virginia is an example of a state that makes it unlawful to ignore tax holidays. They do, however, allow sellers to absorb the sales tax. Moreover, not collecting sales tax in a state where you have nexus is illegal so choose this option at your own risk - we don’t recommend it.
Option 2: Turn off Tax Collection for Qualifying Goods
During the tax holiday, sellers may turn tax collection off for specific, qualifying products. As we mentioned, some ecommerce platforms provide the option of creating product groupings and manually setting tax overrides (in this case 0%) to accommodate tax holidays.
Option 3: Turn Off Tax Collection for All Goods
The complexity here should be obvious. While a straightforward change to make on any ecommerce platform, the implications are serious as failure to collect sales tax on goods not included in the tax holiday places the responsibility of that revenue squarely on the seller.
Option 4: Issue Refunds
A final option is for sellers to continue to collect sales tax as usual and issue refunds for qualifying purchases. This involves a lot of extra work and is likely to be avoided by most larger sellers.
Capitalizing on Tax Holidays
It isn’t all doom and gloom for online sellers. Many businesses view sales tax holidays as a marketing opportunity. Realizing that many consumers are unaware of this tax-free buying window, sellers can take the opportunity to bring their audience up to speed by advertising the event, much like a sale.
As tax holidays align with other well known events (back to school is a common marketing event), integrating the tax discount into pre-existing messaging only strengthens the offer. Take advantage of the buyer mindset during these times by reminding your buyers of the discount and motivating them to buy more goods.