Sales Tax Holidays May Be Going Away

Massachusetts decided this year to cancel its sales tax holiday, and in the years ahead other states may decide to follow suit.

“Massachusetts, a lot of times when they run their sales tax holiday, they exempt everything except for vehicles,” said Sonya Daniels, a state and local tax manager at CBIZ MHM. “So they decided against having a sales tax holiday this year. But the rest of the states that typically participate, mostly in the Southeast, are participating as they have in the past.”

Massachusetts officials cited the high cost of the exemption on the 6.25 percent sales tax, estimated to cost up to $26 million. The commonwealth has had the sales tax holiday in place ever since 2004, except for 2009 when state revenues took a major hit from the recession. But Massachusetts is facing a substantial budget shortfall this year that could be as high as $1 billion, according to some estimates, and lawmakers are searching for ways to fill the gap.

“If you think about it, a state depends so much on sales tax for revenue,” said Daniels. “While the rate in Massachusetts may seem lower than in a lot of other states, when you think about that tax rate on every tangible product a company would sell, and for two days they’re not collecting that tax, that’s a pretty large hit to Massachusetts for all of their retailers across the state to do that.”

This year, 17 states are offering sales tax holidays: Alabama, Arkansas, Connecticut, Florida, Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia. For the most part, the rules exempt back-to-school shopping items, but they vary from state to state.

“From the end of July through early September, what they’re running basically is back-to-school,” said Daniels. “Computers are included a lot of times, but you mainly have clothes, paper, pencils, backpacks, all that kind of stuff. Alabama, Georgia, Louisiana, Maryland, Mississippi, Missouri and Texas all have a different kind of sales tax holiday at other times of the year, maybe on hurricane preparedness in Florida, or energy-saving appliances, or in Mississippi hunting supplies, but right now what they’re running is basically on back-to-school supplies.”

In most states, the sales tax holiday lasts over the course of a weekend from Friday through Sunday, with the exception of Connecticut, where it runs for a full week. Each state generally lists on its tax department’s website the specific timing and items included.

“They have a specific list of items that they’re selling tax exempt during that time, and you have to watch to make sure it’s within a specific dollar amount range,” Daniels advised. “They’re following the same general rules they follow every year.”

However, she is hearing more talk about states possibly dropping the sales tax holiday in future years, as Massachusetts decided to do this year. “I’m wondering in the next few years if you’re not going to see more drop off,” said Daniels. “A lot of states are talking about the loss of revenues during that time. When they first started this, online sales weren’t considered. Now you can go online during that time in most of these states and purchase. As long as you’re within that window, they’re tax exempt online as well, so it’s even bigger revenues being lost.”

Retailers, on the other hand, mostly are in favor of continuing the tax holidays. “The retailers seem to want to keep it going,” said Daniels. “It’s basically free advertising during this time. Everybody’s talking about the sales tax holiday: go to your retailers and buy this. They’ve worked past the cost of doing this if they’ve been around for a while. Right now it’s getting the people in the stores during that period of time based on somebody else’s ads.”

However, consumers should beware that prices may actually be lower in the period just ahead of the sales tax holiday.

“Make sure you don’t miss any good sales leading up to those dates,” said Daniels. “A lot of times retailers are running some really good sales in a couple of weeks before these dates, and then on these dates the sales are not as good, but you’re saving on the tax. As a mother who’s sending her kids back to school, you may want to watch the papers and watch what’s coming up to be sure you’re getting the best deal. Saving the tax may not be your best deal.”

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