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Sales tax holidays come with a few surprises

Looking to save money with your back-to-school shopping?

Gregory Andersen

Managing Editor at Tally

August 2, 2018

On the surface, sales tax holidays seems like a great idea: If you do your seasonal shopping during certain days of the year, you won’t have to pay sales tax. Simple enough, right?

Well, this great idea comes with a few surprises.

What is a sales tax holiday?

Exactly what it sounds like. During certain days every year, retailers won’t charge you state sales tax (and sometimes local sales tax) on certain things you buy.

Sixteen states will offer at least one sales tax holiday in 2019. Some states offer multiple holidays, but most hold just one in the summer months with a specific focus on back-to-school shopping.

The dates and duration of the sales tax holidays vary by state, as do the goods that are exempt from sales tax and the maximum cost per good. Find out if and when your state offers a sales tax holiday.

Florida, for example, has two sales tax holidays: one in June with a focus on disaster preparedness, and one in August with a focus on back-to-school shopping. For seven days across May and June (May 31 - June 6), you can spend up to $750 on a generator and up to $50 on other supplies without having to pay sales tax. And for 5 days in August (Aug. 2-6), you can spend up to $60 per clothing item, $15 per item on school supplies and up to $1,000 on computers — all free of sales tax.

Does my state offer a sales tax holiday?

The following states have one sales tax holiday (with combined state and average local sales tax rates, as of Jan. 1, 2018):

Arkansas (9.41%), Connecticut (6.35%), Iowa (6.8%), Louisiana (10.02%), New Mexico (7.66%), Ohio (7.15%), Oklahoma (8.91%), South Carolina (7.37%), Tennessee (9.46%), Virginia (5.63%) and Wisconsin (5.42%).

The remaining five state have at least two sales tax holidays (with combined average tax rates):

Alabama (two holidays, 9.1%), Florida (two holidays, 6.8%), Maryland (two holidays, 6%), Mississippi (two holidays, 7.07%), Missouri (two holidays, 8.03%) and Texas (three holidays, 8.17%).

States are continuously changing their approach to sales tax holidays. Wisconsin joined in on the action for the first time in 2018, while Louisiana in June suspended its sales tax holiday program going forward (though it had already occurred in May.) Massachusetts is also considering establishing a sales tax holiday in 2018 and has approved legislation for sales tax holidays in 2019 and beyond.

When did sales tax holidays begin?

Sales tax holidays have been around for almost 40 years. Ohio and Michigan started the trend in 1980 by offering one-time tax holidays on car purchases, but New York put sales tax holidays on the map in 1997 in an attempt to curb cross-border shopping.

At the time, New York residents were leaving the state in search of lower sales tax rates. To counteract the allure of saving money by buying clothes in New Jersey, New York enacted its first sales tax holiday — and the rest is history.

Since then, more than a dozen states have jumped on the sales tax holiday bandwagon, including a few who jumped right back off. Florida and Maryland canceled their holidays in 2007 due to economic downturn (though they have since been reinstated), and North Carolina nixed its holiday entirely in 2013. Notably, some counties and towns have been known to opt out their state’s sales tax holidays.

Who benefits from a sales tax holiday?

It depends on who you ask. Conventional wisdom says you, the consumer, have the most to gain.

If you’re going to do back-to-school shopping regardless of a holiday, it stands to reason that not paying sales tax will save you money. The same goes for disaster preparedness and other seasonal purchases.

In March 2018, the Federal Reserve System’s Board of Governors published findings about the holidays’ overall impact on consumer spending and found the sharpest responses to the sales tax holidays were related to purchases of durable goods. It specifically cited a study of spending patterns in Massachusetts in August 2014 and August 2015 that showed the state’s sales tax holiday resulted in an overall boost in retail sales for the month.

The findings also pointed to benefits for low-income households.

“Often, these tax holidays are timed so they coincide with heavy shopping periods for necessities, such as school supplies,” the Federal Reserve wrote. “In such cases, these policies tend to be especially beneficial to low-income households, since necessities comprise a relatively large share of their overall spending.”

So, the Federal Reserve sees some good in sales tax holidays (though it’s less conclusive about long-term benefits).

But the Tax Foundation, a nonprofit tax policy organization that’s been around since 1937, isn’t buying it.

In its report, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy, 2018,” the Tax Foundation concludes that sales tax holidays “do not promote economic growth or significantly increase consumer purchases. Instead, buyers are simply making their purchases at a different time.

In 1997, during one of the first sales tax holidays in the United States, the New York Department of Taxation and Finance found that purchases of the tax-exempt goods in increased during the holiday but that sales for the year remained the same. Shoppers seemingly waited until the holiday to make their purchases, which resulted in fewer sales in the weeks immediately before and after the sales tax holiday.

The Tax Foundation also found fault with the claims that low-income families specifically benefit from the holidays, though the savings are offered to everyone. In fact, because the holidays are limited to a few days, the nonprofit claims low-income consumers may have a more difficult time shopping during the designated time.

“If the citizens of a state determine that there truly is a legitimate need to help low-income consumers obtain particular products,” the Tax Foundation wrote, “a more targeted and effective approach could be a rebate or voucher program.”

How do I get the most out of a sales tax holiday?

By understanding the holiday for what it is. If you’re going to purchase school supplies in the summer, it’s worth trying to save money on a sales tax holiday. Here are three tips for the holiday:

1. Check prices before and after the holiday.

If you plan on buying pencils, find out how much pencils normally cost. If they’re $4 per pack, make sure you’re not paying more than that.

The Tax Foundation reported that some retailers may raise the prices of tax-exempt goods during the holiday, thereby absorbing the savings that are intended for you. In one case, a reporter in North Carolina found that savings were actually greater in the weeks leading up to the tax holiday.

2. Continue to shop around.

A sales tax holiday might be statewide, but there’s still competition between stores. (Keep in mind: Retailers have been known to opt-out.)

It’s OK to hunt for the biggest bargain. Just because your state is waiving the sales tax doesn’t mean the price is the same everywhere. In fact, the increase in shoppers during a sales tax holiday is an even greater incentive for retailers to offer competitive pricing.

Just do your homework.

3. Maintain reasonable expectations.

Your sales tax holiday savings won’t be funding your next vacation. Even the biggest spenders will feel the constraints of the exempt goods list and the per-item limits.

But there are still benefits to be had.

A few dollars on every annual purchase, over the course of a decade or more, adds up quickly. Sales tax holidays can also help you develop healthy spending habits. If you keep tabs on the things you’d like to buy, and monitor the prices of the goods prior to purchasing them, you’ll begin saving money all year long.

Bottom line: A sales tax holiday can save you money if you’re willing to spend the necessary time and effort on research to make sure the savings are genuine.