From time to time, certain states will declare a “sales tax holiday” or “tax free weekend” on certain items. The most famous sales tax holidays take place in the fall and are collectively known as “Back to School Sales Tax Holidays.” But some states declare sales tax holidays at other times, such as during the spring for hurricane preparedness, or in order to encourage consumers to buy certain products, such as sales tax holidays on energy and water-saving appliances.
What are sales tax holidays? Why do we have them? And as e-commerce retailers, how do we deal with them? Read on for everything you need to know about sales tax holidays.
What are sales tax holidays?
A sales tax holiday is a short period of (generally from a weekend to a week) where a state declares that certain items are to be sold without sales tax.
Like many state-level policies, sales tax policies are generally used by states to encourage consumer behavior. For example, some states have tax-free holidays on energy efficient appliances or severe-weather preparedness to encourage residents to purchase these items.
The main types of sales tax holidays are:
- Back to School – generally held in the fall, this is the most common type of sales tax holiday; tax free items generally include clothing, school supplies, and even computers and tablets used in schooling
- Severe Weather Preparedness – generally take place in states that typically experience hurricanes and other bad weather; tax free items can include safety equipment, generators, power cords, hurricane shutters and other items that will assist during severe weather
- Energy Efficiency – This holiday is to encourage consumers to purchase energy efficient appliances and accessories by foregoing sales tax on ENERGY STAR rated dishwashers, clothes washers and related environmentally-conscious items
Recently some states have expanded the traditional definition of sales tax holidays. For example, Florida has been holding a “Freedom Week,” which is now a “Freedom Summer,” where event admissions are tax-free. This is to encourage outdoor activities and tourism. And in October 2023, Nevada is holding a sales tax holiday for all National Guard members and their families.
Every US state gets to make its own rules and laws about sales tax, so there is no nationwide sales tax holiday.
Why do we have sales tax holidays?
Sales tax has been around since the 1930s, but sales tax holidays are a fairly new phenomenon. According to the Tax Foundation, New York held one of the earliest sales tax holidays back in 1997 as a way to keep shoppers spending within their borders instead of hopping over to a state with lower sales tax rates.
The state’s urge to use sales tax holidays to encourage consumer behavior started at around the same time. When, in the year 2000, a survey showed that Pennsylvanians were 36th out of the 50 states in computer ownership, the state exempted personal computers from sales tax to encourage their residents to digitize.
Sales tax holidays are also politically popular. Who doesn’t want a weekend where you can get an average 4-8% discount when out shopping?
But sales tax holidays are less popular with e-commerce retailers.
E-Commerce Retailers: How to Handle Sales Tax Holidays
Sales tax holidays are complicated for online retailers because they generally only apply to specific items. It would be much easier if everything in your store was tax exempt for a weekend. You could shut sales tax collection off, go about your business, and turn it back on when the holiday ends.
Another option you might consider is to simply not participate in the sales tax holiday. And some states say that is a-okay and that retailers can choose to opt-in. However, most states make sales tax holidays mandatory for retailers.
Plus, sales tax holidays are generally a high volume shopping weekend. If you don’t participate in the holiday, a bargain-shopping customer will likely abandon their cart in favor of an online store that is participating in the holiday.
If you sell on marketplaces
The good news here is that the major online marketplaces like Amazon and Walmart collect sales tax on your behalf. It’s their responsibility to comply with the sales tax holiday.
If you sell using an online shopping cart
This is where your mileage may vary. If you sell on an online shopping cart like Shopify, we recommend checking their sales tax holiday policy in advance. Many online shopping carts, like Shopify, have advanced sales tax engines that take sales tax holidays into account. If the online shopping cart does not account for sales tax holidays, read on for more tips.
If you use a sales tax collection API
Most sales tax collection APIs like TaxJar or AvaTax were built specifically to deal with the vagaries of sales tax, including sales tax holidays. But to ensure that your shopping cart or sales tax collection engine participates in a holiday on your behalf you should…
Ensure your products are categorized correctly
Your online shopping cart or sales tax collection engine won’t know that you are selling a tax-free item (like clothing or generators) unless you tell them. That’s why it’s so important to properly categorize any products that you sell.
When you first get started selling online, it’s easy to skip this step and just list all of your SKUs as “taxable items.” But as soon as you get into sales tax discrepancies, such as the states where clothing and groceries are not taxable, you’ll start running into issues. You can count on customers who live in Pennsylvania to notice when they are being charged sales tax on clothing when clothing is non-taxable in that state.
Before a sales tax holiday starts, check that all of your products are properly categorized so that your customers can easily buy them tax-free during the holiday period.
Are you unsure whether your products are taxable or not? Or if they fall under the exempt categories for sales tax holidays? Contact HOST today and we’ll create a taxability matrix to ensure you are collecting the right amount of sales tax on each of your products in every state, on every sales tax holiday.
Consider the manual option
In some cases, such as if your online store has few SKUs, you might consider manually turning off sales tax collection to any SKUs that are subject to the sales tax holiday. While this is less than ideal, it can also ensure that you participate in the holiday. This makes both the state and your customers happy.
Just remember to turn sales tax collection back on as soon as the holiday is over. Failing to collect sales tax on taxable items can, of course, result in having to dip into your own profits to replay the sales tax due.
When are the sales tax holidays?
You can see a list of 2023 Back to School Sales Tax Holidays here.