Why Sales Tax Holidays Are A Headache for Tax Administrators, Shoppers, And Retailers

Whether to celebrate July 4, remind people to stock up on emergency supplies, or entice back-to-school shoppers, sales tax holidays are perennially popular. Yet they often fail at their main objective – making products more affordable – and they can turn sales tax administration into a time-consuming mess.

This post will focus on the administrative piece, although there is no shortage of analysis, including from the Tax Policy Center, showing that sales tax holidays don’t really benefit consumers or the economy. Instead they simply shift the timing of purchases and give retailers more flexibility to raise prices.

What gets less attention is how these holidays create inevitable challenges of defining seemingly simple categories of goods for tax purposes. Added to arbitrary product definitions are arbitrary deadlines.  

Florida’s “Freedom Week” sales tax holiday provides a good example. The recent tax-free week mostly applied to July 1-7, and covered sporting equipment and items for outdoor activities such as camping, hiking, fishing, and so on.

But live music, sports, theater, and festivals also qualified— and through the end of the calendar year. This means you can save on tickets for the Jacksonville Jaguars December 19 2021 home game against the Houston Texans but not the January 9, 2022 final home game against the Indianapolis Colts.

OK, the timeframe seems odd, but surely knowing what’s tax free can’t be that difficult. Sporting goods and camping equipment: that’s all the stuff you get at the local REI, Bass Pro Shop, or Cabela’s, right? Actually, no. Sports equipment, at least as defined for this tax holiday, includes baseball gloves and soccer knee pads but not the cleats for either sport.

Florida’s Department of Revenue also took care to warn that pool toys were not eligible, except for “inflatable recreational water tubes and floats that are capable of being towed.” But sunscreen and sunglasses were tax free.

Sometimes, it’s not just about what’s taxed, but how much it costs. Not wanting to subsidize luxury purchases, sales tax holiday architects often include price limits for tax-free eligibility. Tennessee’s upcoming back-to-school holiday from July 30 to August 1 exempts clothing and school supplies (such as backpacks, crayons, pens, and paper) so long as the item is priced at $100 or less. For computers, the cutoff is $1,500 – although printer supplies and storage devices still will be taxable.

Sales tax holidays are here to stay. But the next time you see an ad for one, just know that you probably won’t save any money and the unfortunate IT specialists who program your local retailer’s software are probably working overtime.