How to successfully handle sales tax during sales tax holidays
- Sales and Use Tax
- August 1, 2017 | Gail Cole
Ten states are providing tax-free periods the weekend of August 4: Arkansas, Florida, Iowa, Louisiana*, Missouri, New Mexico, Ohio, Oklahoma, South Carolina, and Virginia. Connecticut (Aug. 20–26), Maryland (Aug. 13–19), Mississippi (Aug. 25–27), and Texas (Aug. 11–13) will have sales tax holidays later this month.
Sales tax holidays tend to bring customers through the door (and online) and therefore can boost business for retailers selling qualifying goods. However, they also have a hidden cost: They complicate sales and use tax compliance.
Below are five sales tax holiday pitfalls retailers will face this month, and tips to successfully negotiate them.
Sales tax holiday pitfalls
Different start and end times. Although 10 states will have sales tax holidays this weekend, they won’t all start and end the same date or time. For example, the Iowa and Louisiana sales tax holidays run August 4–5, Florida’s runs August 4–6, and the Arkansas holiday takes place August 5–6.
Differences can be even more minute. While the Ohio holiday starts August 4 at 12:00 a.m., the Florida, South Carolina, and Virginia tax-free periods start one minute later, at 12:01 a.m. Missouri’s tax-free period terminates at midnight; Florida’s concludes at 11:59 p.m.
Tip: Retailers selling affected goods in more than one sales tax state need to ensure their point of sale systems are properly programmed, down to the minute.
Different price restrictions. Many state sales tax holidays include price restrictions, and these typically vary from state to state. For example, Florida exempts school supplies selling for $15 or less, while the price limit for school supplies is $50 per purchase in Missouri and $30 in New Mexico (excluding backpacks and bookbags, which top off at $100). Clothing in Florida must cost $60 or less to qualify for a tax exemption, whereas the exemption applies to clothing costing up to $100 in Iowa. There is no price restriction on eligible school supplies in Arkansas, yet price restrictions do apply to clothing and clothing accessories.
Generally, items costing more than the allowed amount don’t qualify for the exemption. However, some states do exempt a portion of a sale. This year, for example, Maryland is exempting the first $40 of a backpack or bookbag.
Tip: Be sure state price restrictions are included in point of sale systems, and train staff so they’re aware of them.
Discounts. States may apply different rules to coupons and discounts. Arkansas allows retailers to accept store coupons and discounts to reduce the selling price of a qualifying item, but not manufacturer’s coupons or rebates. Ohio has a similar policy. Yet manufacturer’s coupons, discounts, and rebates do reduce the price of eligible items in Florida, so long as the retailer is reimbursed the amount of the discount.
Tip: State department of revenue websites usually offer guidelines for retailers. Read these carefully to ensure you apply tax properly in each state.
Optional participation. The sales tax exemption provided during tax-free periods generally applies to both state and local sales taxes. However, this isn’t always the case. In Alabama and Missouri, for example, local governments are permitted to opt out; in areas that are not participating at the local level, state sales tax is exempt but all applicable local sales taxes apply.
Optional participation may be possible at the business level, too. Although participation in sales tax holidays is mandatory in most states, Florida allows retailers whose sales of qualifying items made up less than 5 percent of their gross sales of tangible personal property in 2016 to opt out (with written notice).
Tip: Check to see if the exemption extends to local tax in all areas where you sell.
Shipping and handling. The taxability of shipping and handling charges also varies from state to state. For example, transportation charges billed by a seller to a buyer are exempt in Texas if the item(s) being shipped is exempt, and taxable if the item is taxable. However, if the delivery charge is a flat rate per package or delivery address regardless of the quantity of items shipped, the total shipping cost may be attributed to one of the items rather than be allocated proportionately. The invoice must state to which item the shipping charge is attributed.
This is not the case in Florida. If shipping and handling charges are included in the sales price of an item in the Sunshine State, and multiple items on an invoice or receipt are shipped, the shipping and handling charge must be apportioned to each item on the invoice or receipt. Delivery charges for exempt items are exempt; charges for taxable items are taxable.
Tip: Know the law in each state where you sell, and apply it correctly.
A seamless solution: sales tax automation
Complying with sales tax holiday rules in one state and locality is challenging, but manageable. Retailers that sell qualifying goods in multiple sales tax holiday states should consider adopting a more seamless solution, like sales tax automation software. Learn more.
* Louisiana is reducing sales tax during this year's sales tax holiday instead of providing a full exemption. Additional information.