Do Sales Tax Holidays Make Good Cents?
- Sales and Use Tax
- May 27, 2014 | Gail Cole
At first glance, sales tax holidays seem like a win for all involved. Consumers save money on items they need, such as school supplies, clothing, and emergency supplies. Retailers get a business boost. Lawmakers feel the love of people with more money in their pockets. Win. Win. Win.
Indeed, a lot of positive press surrounds tax-free periods. WALB of Georgia, announcing the return of two Georgia sales tax holidays quoted happy retailers and happy mothers. Online Athens called tax-free periods “a win for retailers” and “good for customers.” It also noted that sales tax holidays give Georgia’s brick-and-mortar shops an advantage over retailers in neighboring states and put them on more level ground with online retailers not required to collect sales tax. That’s four wins.
Yet tax experts disagree about the benefits of sales tax holidays. Some say tax-free periods create more losses than wins. What are the pros and cons of tax holidays from the perspectives of the key players involved?
Businesses benefit the most from tax-free periods, says T.R. White III of the University of Virginia. William Fox, Director for Business & Economic Research at the University of Tennessee, concurs: “[E]vidence suggests the benefit is most for businesses… [which may be] less likely to have sales during a tax holiday, and maybe even [more likely] to increase their price a little bit.” And indeed, retailers often speak positively of the high-traffic generated by sales tax holidays.
Yet in stark opposition to the opinions expressed in WALB of Georgia and Online Athens, the Georgia Budget and Policy Institute calls the state’s sales tax holidays “a bad deal for all involved,” underscoring how they “over-burden businesses.”
According to the Tax Foundation, a conservative think-tank, tax-free periods have hidden costs and mean extra work for retailers. Advertising costs may spike as retailers advertise the tax-free period. Additional employees may have to be on hand to help the additional customers.
Perhaps most notable is that “sales tax holidays add complexity to sales taxes and are accompanied by administrative costs which can place a large burden on businesses. This extra burden represents a real cost to businesses, particularly small businesses, as valuable resources are diverted to pay for compliance with and implementation of sales tax holidays.” Examples of extra work include:
- Accounting for differences in state and local taxes (in Alabama, for example, state tax must not be charged but local taxes may apply);
- Accounting for year-to-year changes;
- Hiring extra employees or paying overtime;
- “Operating under more than one set of sales tax laws each year;” and
- Reprogramming registers and computer systems.
Are sales tax holidays worth the extra work? Maybe not. Mildred Robinson of the University of Virginia argues that consumers buy during tax-free periods items they would purchase at some point anyway (school supplies, clothing, shoes). They simply avoid sales tax.
The remote retailer
Brick-and-mortar business owners have long been pushing for a level playing field, whereby remote retailers have to collect sales tax like their Main Street counterparts. Remote retailers selling into states with Internet sales tax laws must comply with sales tax holidays as well. Thus Amazon, which now collects sales tax in Georgia, must be prepared to not charge sales tax during the state’s two sales tax holidays.
In addition, the sales tax compliance burdens outlined above may be multiplied for the remote retailer. Amazon must account for the fact that in Virginia, shipping charges are not exempt during sales tax holidays and in Texas, shipping charges are exempt during sales tax holidays. And so on.
Finally, many state sales tax holidays are created on an annual or semi-annual basis. Businesses don’t always know if and when holidays will occur until the last minute. In Alabama, for example, local tax jurisdictions don’t have to participate in sales tax holidays and have until two weeks prior to the start of the holiday to notify the state whether or not they will participate. That doesn’t give businesses much time to prepare.
“[E]very tax cut means we have to raise taxes somewhere else,” says Charles L. Ballard, Professor of Economics at Michigan State University. Calvin Blackwell of the College of Charleston concurs, “Governments do have to generate revenue somehow, and a sales tax holiday may require the government to generate more revenue from other types of taxes… and this substitute may or may not be a good thing.”
In 2009, the District of Columbia cancelled its sales tax holiday just weeks prior to its scheduled start, citing “declining revenue and a widening budget shortfall.” And “Georgia’s sales tax holidays will cost the state an estimated $40 million per year,” according to a 2012 article by the Georgia Budget and Policy Institute.
Yet not all experts agree:
- William Fox: sales tax holidays have “very little impact on the economy of the state.”
- Mildred Robinson: the revenue loss “does not seem to be really important enough to create a problem.”
Most experts do agree that consumers benefit from sales tax holidays, at least to some extent. The “consumer will reap most of the benefit,” says Charles L. Ballard. Yet both William Fox and the Tax Foundation suggest some retailers may actually raise prices during sales tax holidays. This would decrease consumer savings.
Furthermore, some consumers may not be able to take advantage of sales tax holiday savings because tax holidays occur during specific, limited periods of time. Tax-free periods are touted as a form of tax relief, particularly for lower-income taxpayers, but that assumes those lower-income taxpayers have money to spend and time to shop during the holidays. According to Mildred Robinson, no one knows if consumers “who would be unable otherwise to afford that cost” actually benefit from sales tax holidays.
Given these pros and cons, what do you think of sales tax holidays? Do they make economic sense? Leave your thoughts in the comments below.
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