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:
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.
