This post is by Jennifer Dunn, Chief of Content at TaxJar. Throughout her writing career, she has specialized in demystifying tricky income and sales tax concepts for business owners. Connect with Jennifer at @TaxJarJenn.
“Tax-free weekend.” “Severe weather preparedness holiday.” Depending on what part of the country you’re in, you may see sales tax holidays crop up in your state from time to time. As a buyer, they can be a great way to save a few bucks on school supplies or a new, more energy-efficient washing machine.
But as an online seller, sales tax holidays can present a major headache. If buyers are buying school supplies from your out-of-state online store during the tax-free weekend, they’re going to expect a tax-free purchase. If you aren’t prepared, you may end up with some unhappy customers.
But before we get to how online sellers should handle sales tax holidays, let’s back up. What’s the deal with sales tax holidays anyway?
A Brief History of Sales Tax Holidays
Sales tax holidays in the US are less than 20 years old, with the first one taking place in New York, in just 1997. States have chosen to enact them for a few reasons:
- To keep revenue in the state – That first New York sales tax holiday came in response to the fact that New York taxed clothing, while neighbor New Jersey did not. The sales tax holiday was designed to keep the revenue from clothing sales in New York.
- To stimulate buying – In the late 90s, unlike today, state coffers were often in surplus. State lawmakers – who could afford it – saw sales tax holidays as a politically popular way to encourage their constituents to get out and spend money at local retailers. It stands to reason that sales tax holidays remained politically popular in bust times, as well, when lawmakers could win political points for saving their constituents money at key spending times, like right before the kids returned to school.
- To encourage state policies – “Back to School” sales tax holidays are seen as assisting families with education costs. Florida holds a “Hurricane Preparedness Holiday” designed to help citizens (and the state) mitigate damage during and after a hurricane. Georgia’s “Energy Efficient Appliances” sales tax holiday was introduced during a surge in energy prices after Hurricane Katrina.
Though there is some debate about whether they actually accomplish their stated purpose, about one third of US states that have a sales tax also have at least one sales tax holiday every year.
Online Sales and Sales Tax Holidays
During sales tax holidays, your online customers will likely expect that their purchases from you will also be tax-free.
As a seller, you need to do a few things to prepare for a sales tax holiday:
- Determine when and where sales tax holidays occur – First of all, you need to determine if you have sales tax nexus in a state that has a sales tax holiday. If not, then you won’t have to worry about sales tax holidays! But do keep in mind that some states will pass a sales tax holiday bill just a few days before a sales tax holiday occurs. To help you plan, here’s a constantly updated list of sales tax holidays in 2016.
- Determine the taxability of your products – If you do have sales tax nexus in a state, determine if you sell any products that are subject to the sales tax holidays in that state. Ex: If you sell children’s toys, then you likely won’t have any reason to worry about complying with a sales tax holiday that exempts energy-efficient appliances.
- Set up your shopping carts and marketplaces to comply with the holiday – Unfortunately, most popular shopping carts and marketplaces do not automatically handle tax-free holidays. I’ll cover what to do in this situation in the next section.
Sales Tax Holiday Pitfalls Online Sellers Face
Every state is slightly different when it comes to sales tax laws and standards, and that’s no different when it comes to governing sales tax holidays.
Local Participation Pains
Some states, like Virginia, require all retailers to participate in sales tax holidays.
Others allow local areas to opt-out of the sales tax holiday. But this creates a pain point for retailers who must then figure out how to collect a local sales tax (or taxes) without collecting a state sales tax.
Here’s an example from Missouri Department of Revenue website:
A city with a 2% city sales tax chooses not to participate in the Back-to-School Sales Tax Holiday. The county in which the city is located has a .5% county sales tax and chooses to participate in the holiday. A customer purchases a computer costing $3,000 during the holiday in a store located in the city. The computer is exempt from the state tax rate of 4.225% and the local county tax rate of .5% but is subject to the local city rate of 2%. The customer pays $60 ($3,000 x 2%) in city sales tax on the sale of the computer.
Other states that allow localities to opt-out say that online sellers (based out of state but still collecting sales tax in-state) can opt-out altogether.
Online retailers will need to make sure they are collecting the correct amount of sales tax from buyers in accordance with those districts and rates.
In most cases, if a sale is non-taxable, the shipping fees you charge the customer to ship the item are also non-taxable. Online retailers will need to make sure their shopping carts and marketplaces are set up to omit sales tax on shipping when shipping non-taxable items. Also, most states also say that if a shipment includes a mix of taxable and non-taxable items, then sales tax should only be charged on a portion of the shipping fee.
Product Taxability Pains
During sales tax holidays, only some products are tax exempt. Online sellers need to determine which products in their catalogs are tax exempt and omit sales tax on those products. This can be especially difficult if you sell on a marketplace or shopping cart with simple sales tax collection options that don’t allow you to exempt certain items.
If you have a large catalog, it can also be painful to exempt many items from sales tax for just a few days. Often, this process is manual and tedious.
In some states, only items under a certain price are tax exempt during sales tax holidays. For example, during Ohio’s Back-to-School sales tax holiday, only clothing items priced at $75 and under and school supplies priced at $20 or under per item will be tax exempt.
Online retailers need to determine how to make sure they are exempting the right items at the right price points from sales tax.
As an online seller, especially if you sell on a platform like Amazon, you’re likely familiar with instances where a customer places an order on one day but the transaction processes on another day and the item ships on still another day.
Michael Fleming of Peisner Johnson cautions sellers to determine if states “use the order date, the shipping data, the payment date or a combination” to determine when the “sale” takes place.
Strategies for Online Sellers Dealing with Sales Tax Holidays
This may sound complex, but all hope isn’t lost. There are a few strategies for dealing with sales tax holidays:
Get Your Sales Channel to Handle Sales Tax Holidays for You
The good news is that Amazon has a very robust sales tax collection engine. As long as you have your product tax codes set up correctly on your various products, then Amazon will handle sales tax holidays. TaxJar’s SmartCalcs sales tax API also handles sales tax holidays as long as you have your product codes set up correctly.
The bad news is that most shopping carts and marketplaces aren’t as robust, and don’t take sales tax holidays into account.
Absorb the Sales Tax
Another option if you sell items that will be subject to a sales tax holiday (like clothing or school supplies) is to completely turn off sales tax collection in the state during the sales tax holiday and absorb the cost into your store.
For example, say your store sells clothing and posters. The clothing will be tax exempt during Arkansas’ sales tax holiday, but the posters will not. You can opt to simply not charge sales tax on any items during the holiday, and then remit the amount of sales tax that you should have collected on the non-exempt posters to the state when it comes time to file your sales tax return.
Virginia, for example, is a state that doesn’t usually allow absorption of sales tax into the sales price of an item, but makes an exception during sales tax holidays due to the hardships that retailers sometimes face exempting items.
Ignore the Sales Tax Holiday
You can also opt not to change anything and ignore the sales tax holiday. Keep in mind that in states like Virginia, who mandate all retailers participate, you may be going against the letter of the law.
Another pitfall is that buyers may complain when they were charged sales tax on an item from your store that is supposed to be tax exempt. Of course, it’s your business and up to you to set policies during a sales tax holiday.
Here’s what Virginia has to say to retailers who ignore the sale tax holiday:
Any dealer collecting the sales or use tax on nontaxable transactions must remit any erroneously or illegally collected tax to the Department of Taxation unless he can show that the tax has been refunded to the purchaser or credited to the purchaser’s account.
Refund Sales Tax After the Fact
If you want to take a more proactive approach to sales tax holidays but are unable to set your shopping cart or marketplace’s sales tax calculation engine to handle a sales tax holiday, you can also choose to later refund any sales tax you collect on an item that should have been tax exempt.
While some of these tactics are less than ideal, hopefully you will find one (or a combination) that works for you, your company and your customers.
Finally, if you ever have any questions about how to deal with a sales tax holiday in a state, give that state’s taxing authority a call. They can help guide you on issues such as whether you can opt out of a sales tax holiday if you live out of state, or in which jurisdictions you need to collect local rates.
Be sure to ask for documentation proving the state’s stance, such as a law, letter ruling or special bulletin from the department. Unfortunately, a phone conversation with a state representative won’t hold up in case of an audit. If the state proves unhelpful, you can also consult with a CPA or tax attorney who specializes in sales tax.
Do you have questions or comments about handling sales tax holidays in your online store? We’d love to chat. Start the conversation in the comments!
Reference: List of Sales Tax Holidays in 2016