Sales tax holidays prepare retailers for year-end holidays

It’s summertime, and the sales taxin’ is anything but easy. Tax rates are jumping around — thanks to tax holidays in many states — and complexity is high.

These hot days of summer are also the time for retailers to begin planning their year-end holiday sales, which — given supply chain challenges and new methods of shopping and shipping — are even more difficult now.

Two factors have prompted many states to enact new or expanded sales tax holidays this year:

1. Many states are running budget surpluses, after stronger-than-expected economic recoveries from the COVID-19 shutdowns in 2020 and 2021.
2. Voters are dealing with inflation — and record high gasoline prices.

As a result, many governors and legislators have opted to take the politically popular option of added or expanded sales tax holidays, particularly surrounding fuel taxes.

Many of these tax holidays took effect earlier this month, and more will occur in coming weeks as parents start their back-to-school shopping.

Sales tax holidays are popular with shoppers because most people want to feel like they’re saving money. Politicians like them, too, because it’s an easy way to show voters that they’ve done something to reduce their tax burden.

But as a policy question, there’s less support. Many economists argue that sales tax holidays don’t stimulate new economic activity, they just change the timing of it. Families are going to buy new clothing for their children anyway; in states with tax holidays, they will just wait to make the purchase until they can do so tax-free.

For retailers, it’s a mixed bag: While the opportunity to save money on big ticket items like appliances may (or may not) bring extra shoppers into the store or onto the website, retailers have to balance that against staffing increases, inventory management, and sales tax complexity.

For example, some states only suspend collection of the statewide sales tax, but local taxes can still apply. Some states include things like backpacks in their back-to-school tax holidays,  but keep taxes on things like messenger bags. A couple states have overlapping tax holidays, or have set rules that exempt only a portion of the purchase price.

All this adds to the burden of figuring out what to report and how much tax to collect and remit, especially for merchants that haven’t automated their tax compliance processes and are trying to work it out with spreadsheets.  

If you’re in a state that has an upcoming sales tax holiday, you’ll need to plan for it to make sure your staff knows what processes are required to first stop, then restart, collecting sales tax on the sale of specific items. (You can find an updated list of sales tax holidays here.)

And if you’re not in a state that has a sales tax holiday — but you do sell items online — you’d best be aware of those upcoming holidays too.

If you have a physical nexus in that state, as the result of something like a remote employee who works there or a third-party logistics vendor that stores merchandise there, you’ll need to comply with that state’s tax laws, including holidays. The same thing is true if you have an economic nexus in that state, triggered by the number of transactions or dollar value of your online sales to residents there.

And here’s one more thing to consider: If prices at the gas pump stay high, we’re very likely to see states, local governments — and maybe even the federal government — take action to temporarily cut or suspend gas taxes. A few states are considering temporarily or permanently eliminating or reducing the sales tax on food.

The taxes, they are a-changing.

Meanwhile, whether you’re in a state with sales tax holidays or not, now is the time to be planning for your year-end holiday sales.

Supply chains are still snarled worldwide, and analysts don’t expect that to change soon. That’s a very good reason for you to start planning now to improve the odds that you’ll have the inventory you need when shoppers want it.

Adding to the pressure, you’re going to need that inventory on hand earlier than in past years. Analysts say fewer shoppers are waiting to do their holiday shopping on Black Friday or Cyber Monday. That’s true whether they’re doing it online or in person.

If you’re shipping from your store, there could be tax implications, depending on which delivery method you use. New inventory arrangements (like third-party logistics) and order fulfillment models (like ordering online but picking up at a brick-and-mortar store) also have sales tax compliance implications.

You’ll also need to prepare for more in-person shopping this year. After two years of pandemic-related shutdowns, shoppers are looking for an in-person, in-store shopping experience, and analysts believe that trend should hold through the holiday shopping season.

Our new holiday readiness guide for 2022 takes a deep dive into all these issues and more. You can read it here.