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Sales Tax Holidays: Pros and Cons

Sales Tax Holidays: Pros and Cons

Over the last few years, it’s become a trend for states to take “sales tax holidays” throughout the year. These brief periods of generally 2-3 days relieve consumers from tax on certain items and are meant to boost the economy. There are limitations and regulations for each of these holidays, but the idea is to encourage consumers to save money and shop more frequently.

Where Does it Apply?

So far, 19 states held annual tax holidays in 2013, with at least two scheduled in 2014 for Alabama and Puerto Rico – and most likely the other states continuing as well. According to Reuters, Wisconsin is currently considering adding a tax holiday this year. Tax holidays generally focus on one retail area, for example, Alabama’s holiday, from February 21-23, 2014, is strictly for weather preparedness items and is not available everywhere. Several states have tax holidays encouraging the purchase of green or Energy Star items. The most common tax holidays take place in August promoting purchase of clothing and/or school supplies.

The Cons of Sales Tax Holidays

So tax holidays should be a given, especially for states areas that are close to neighboring states that don’t charge tax, right? Not so fast. A tax holiday means decreased state revenues. States lose anywhere from $8 million to nearly $30 million in tax revenue. In fact, North Carolina passed legislation dropping its sales tax holiday for this year, instead using that revenue for “more broad tax relief”, according to Sarah Curry, Director of Fiscal Policy Studies at the John Locke Foundation.

Many experts believe that the sales tax holiday is nothing more than a political ploy to make candidates look good for the short term, but do little to provide real tax relief. Last year, Matt Gardner, executive director of the Institute on Taxation and Economic Policy, disagreed, saying, “There’s no clear evidence that sales tax holidays have a big impact on sales.” Gardner believes that state revenue losses will impact the consumer elsewhere with increased taxes, loss of services, and budget cuts.

Retailers: If your state has a sales tax holiday, plan to make the most of this opportunity. Click To Tweet

The Pros of Sales Tax Holidays

Then, are tax holidays a bust? If you are only measuring tax revenue, of course it’s a negative balance. However, there may be an increase in revenue especially for states with high taxes such as Massachusetts, whose 8th tax holiday in 2013 covered the purchase of nearly any retail item under $2,500. It’s difficult to find reliable statistics on the economic boost such a holiday can provide in terms of increased sales of items that are not tax-free, additional working hours needed to handle the larger consumer turnout, and other benefits the tax relief may provide.

On the retailer side, a sales tax holiday can provide a welcome boost in sales. Many stores hold their prices steady, because of the extra benefit from consumers saving on taxes, but the National Federation of Independent Business, a small-business advocacy association, says retailers will benefit more if they offer sales and promotions during the tax holiday.

Marketing a Sales Tax Holiday to Your Online Shoppers

The debate of the usefulness of sales tax holidays rages on, but if your state has one, plan to make the most of this opportunity. Smart retailers will use this event to promote all their products with sales and promotions, and use prominent displays –online or off – to market non-eligible items. Equally important is educating consumers about the holiday with advertising and announcements. Your state’s tax holiday can provide a great sale event for your store.

Find the latest sales tax holiday information here: http://www.salestaxinstitute.com/resources/sales-tax-holidays