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A Look Ahead: Six Steps to Prepare for Sale Tax Holidays

By Marcia Richards Suelzer, MA, JD | May 10, 2013

Untitled

Numerous states will have their traditional back-to-school sales tax holidays this year. A sales tax holiday is exactly with the name implies: A short-term exemption form the state sales tax that would normally be collected on certain items. And, there are a few other states that provide sales tax holidays for other reasons, such as hurricane preparedness. Consult the tables at the end of this article to see if your state has one or more sales tax holidays. (If you live in Louisiana, Texas, or Virginia, you can use the tips in this article to prepare for the hurricane preparedness sales tax holiday slated for your state at the end of May.)

Just like hosting Thanksgiving dinner, advance planning and preparation is required if you want the event to be successful and as stress-free as possible. This article offers six tips to help you prepare effectively.

Learn What Is Tax-Exempt in Your State

Generally, the holiday takes place during one weekend in August. But, not all items are exempt from tax during the holiday. All the states provide that the exemption applies only to certain items and most limit the exemption to items under a certain price.

Warning

Depending upon the state, city or other local sales taxes may still apply.

It is essential that you know the rules for your state because the types of items that are tax-exempt vary widely. In addition, the rules regarding rain checks, layaway, and gift certificates vary among the states. Finally, each state has its own spin on how to report tax-exempt sales; some require specific reporting and others do not. The bottom line for nearly every small business is recordkeeping headaches in determining what is exempt from tax, and collecting accurate amounts of tax.

The specificity and subtlety of the laws can be surprising. For example, in Florida, a backpack is exempt from tax during the sales tax holiday, but a briefcase is not. Our chart (see below) provides some basic information, but your state department of revenue website provides a comprehensive listing of what is and isn't tax-exempt.

Work Smart

Make enough copies of the list so that there is one at every cash register.

Review Your Inventory Needs

Make sure you have a sufficient quantity of merchandise to meet the demand—particularly for items that are only purchased in large quantities at back-to-school time, such as spiral notebooks. Failing to have sufficient inventory can cost you more than lost revenue during the sale period. It can also cost you goodwill with your customers--even if you issue rain checks. 

Why? Because, in nearly every state, customers have to pay sales tax when the rain check is redeemed, even if the rain check is issued during the sales tax holiday. (There's often an exception for rain checks redeemed during the holiday period, but since the holiday usually is for a single weekend, it's not likely out-of-stock inventory will be replenished that quickly.)

Develop Your Back-to-School Marketing Strategy

Most states that have holidays require merchants to participate if they sell any of the items on the tax-exempt list. So, you may as well make the most of it by designing special promotions and advertising to bring new customers into your store.

Tip

Crafting a marketing strategy is also important because many tax experts assert that sales tax holidays don't generate any extra revenue for retailers, they simply shift when the purchases are made. Translated, this means that you may see a flood of customers during the holiday, but diminished traffic during the remainder of the month.

Your marketing strategy, ideally, will meet two goals:

  • increase spending on non-tax-exempt items during the holiday weekend
  • bring customers back into your store after the weekend is over

To increase spending during the tax holiday, consider offering a discount or special pricing on items that are not tax-exempt, such as sports equipment or cosmetics, to encourage customers to do more of their shopping at your store.

Some states allow the merchant to absorb the sales tax, rather than requiring the customer to pay it. What's more, a few that normally do not permit this tactic, such as Virginia, allow it on non-tax-exempt items provided that you are also selling tax-exempt items. Check with your department of revenue and, if your state allows you to so so, calculate whether advertising "no sales tax on any purchase" makes sense for your bottom-line.

And, to bring those customers back in, how about offering a set amount or a percentage off a purchase next month? Or, if you normally stock school supply items, consider a "frequent buyer" club that allows them to get a special price when they restock their children's supplies during the fall months. Don't forget to use the back-to-school rush to build your email marketing list by offering an incentive if they sign-up. And, don't forget to use your Facebook page to promote your back-to-school sale.

Know the Rules

The rules for discounts, buy-one-get-one offers, gift cards, layaway, and returns vary from state to state and, in many cases, seem to defy logic. In order to be exempt from sales tax, not only must the item be on the list of tax-exempt articles, but the price of the item must also be below a certain amounts. For example, many states provide that clothing that costs $100 or less per item is exempt. 

Determining whether an item costs less than $100 can be trickier than it seems. In many states, a store discount can lower the price to make an item tax exempt, but a manufacturer's coupon cannot. Some states permit you to average the value of items purchased as a "Buy-One-Get-One Free," but do not allow you to average items purchased as "Buy One Get One for Half Price." Nearly every state has rules against pricing items normally sold together, such as a pair of shoes, as separate items in order to stay under the per/item limit. 

The rules also vary on whether delivery or shipping charges must be included in determining the price. As noted earlier, nearly every state provides that rain check items are exempt only when redeemed during the tax holiday. However, the states are dividing regarding layaway items. Given the renewed popularity of layaway purchasing, make sure you know the rules.

Think Ahead

If your state is one that provides a tax exemption when the final payment on the layaway occurs during the tax holiday, you may want to consider alerting your customers to plan now for back-to-school purchases in the late summer. Using social media, such as your Facebook business page or your Twitter account, would be a cost-effective way to communicate customers who are already interested in your business.

Remember, it is essential that you know the rules for your state. Again, your state's department of revenue website should have complete information for each of these situations.

Address Employee Training and Staffing

Your employees have a tremendous impact on the success of your business. Knowledge and competent employees create customer goodwill. This is true year-round, but it is especially important when your store is crowded and procedures are more complex. Take the time to make sure your employees understand what is tax-exempt and what it not. (As noted above, the list of items is not always intuitive!) Not only must your employees know which items are tax-exempt, they need to understand the rules regarding discounts, buy-one-get-one offers and other pricing options. Again, your department of revenue is your best source of information. This is particularly important if you will not be reprogramming your point-of-sales system to handle the sales tax holiday period.

In addition to having knowledgeable employees, make sure that you have enough of them. In addition to increased demand, many states run the holiday from 12:01 AM on Friday until midnight on Sunday. You may want to stay open later during the sales tax holiday. Plan your employee schedules well in advance so you have sufficient employees to restock shelves and run the cash registers without running into wage-and-hour and overtime issues.

Reprogram Your Point-of-Sales Systems

You will need to account for tax-exempt and non-exempt sales. Most point-of-sales systems accommodate sales tax holidays. However, you will have to make sure that the overrides are in place and are functioning correctly. If you rely on a service to handle your systems, make sure you contact them well in advance of the holiday weekend to ensure that the system is ready when your doors open for business.

Tip

If you operate a business in Louisiana, make sure to claim the $25 credit per cash register that the state provides to help defray your reprogramming costs. Even if you aren't in Louisiana, keep a record of any costs you incur in reprogramming your systems. Those costs are tax-deductible business expenses.

Sales Tax Holidays Scheduled for 2013

The following table provides an overview of the rules in each state. Bear in mind that given the current fiscal difficulties that many states face, it is possible that your state may elect to cancel the holiday this year. If you live in one of these states, you will want to download the specific information for your state.

2013 Back-to-School Sales Tax Holidays
State Dates Items Rain checks/Layaway More Information
Alabama August 2-4 Clothing: $100 or less/item
Computers, software: $750 or less/item
School supplies: $50 or less/item
Noncommercial books: $30 or less/item
Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt only if final payment occurs during holiday
Alabama Department of Revenue
Arkansas August 3-4 Clothing: $100 or less/item
Clothing accessory: $50 or less/item
School supplies, school art supplies, school instructional material: No maximum price
Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt if final payment during or after holiday
Arkansas Department of Revenue
Connecticut August 18-24 Clothing and footwear: $300 or less/item Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt, provided item was placed on layaway during holiday
Connecticut Department of Revenue
Florida August 2-4 Clothing: $75 or less/item
School supplies: $15 or less/item
Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt, provided item was placed on layaway during holiday
Florida Department of Revenue
Georgia August
9-10
Clothing: $100 or less/item
Computers: $1,000 or less/item
School supplies: $20 or less/item
Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt only if final payment during holiday
Georgia Department of Revenue
Iowa August 2-3 Clothing and footwear: $100 or less/item Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt provided item was placed on layaway during holiday
Iowa Department of Revenue
Louisiana August 2-3 Any tangible personal property (except cars and meals), that is purchased for nonbusiness use: $2,500 or less/item Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt if final payment during or after holiday
Note: Retailers are eligible for a special "reprogramming" sales tax credit
Louisiana Department of Revenue
Maryland August 11-17 Clothing and footwear: $100 or less/item Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt if final payment during or after holiday
Maryland Department of Revenue
Mississippi July 26-27 Clothing or footwear: $100 or less/item Rain checks: Exempt only if redeemed during holiday
Layaway: Taxable. Layaway sales of eligible items do not qualify for the holiday
Mississippi Department of Revenue
Missouri August 2-4 Clothing: $100 or less/item
School supplies: Up to $50 per purchase
Computer software: $350 or less/item
Computers & peripherals: Up to $3,500
Rain checks: Exempt only if redeemed during holiday
Layaway: Only if final payment during holiday
Retailers who have less than two percent of merchandise qualified for the holiday can provide a tax refund to customers.
Missouri Department of Revenue
New Mexico August 2-4 Clothing and footwear: $100 or less/item
School supplies: $30 or less/item
Computers: $1,000 or less/item
Computer peripherals: $500 or less/item
Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt only if final payment during holiday
Retailers are not required to participate
New Mexico Department of Revenue
North Carolina August 2-4 Clothing: $100 or less/item
School supplies: $100 or less/item
School instructional material: $300 or less/item
Sport/recreational equipment: $50 or less/item
Computers: $3,500 or less/item
Computer supplies: $250 or less/item
Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt if final payment during or after holiday
North Carolina Department of Revenue
Oklahoma August 2-4 Clothing and footwear: $100 or less/item Rain checks: Exempt only if redeemed during holiday
Layaway: Exempt only if final payment during holiday
Oklahoma Department of Revenue
South Carolina August 2-4 Clothing, clothing accessories, footwear, school supplies, computers, printers, printer supplies, computer software, bath washcloths, bath towels, bath rugs, shower curtains, bed linens, pillows: No per item price limit Rain checks: Exempt only if redeemed during holiday
Layaway: Taxable. Layaway sales of eligible items do not qualify for the holiday
South Carolina Department of Revenue
Tennessee August 2-4 Clothing: $100 or less/item
School and school art supplies: $100 or less/item
Computers: $1,500 or less/item
Rain checks: Exempt only if redeemed during holiday
Layaway:Exempt if placed on or picked up from layaway during the holiday
Tennessee Department of Revenue
Texas August 16-18 Clothing and footwear: $100 or less/item
School supplies: $100 or less/item
School backpacks: $100 or less/item
Not specifically stated Texas Department of Revenue
Virginia August 2-4 Clothing and footwear: $100 or less/item
School supplies: $20 or less/item
Rain checks: Only if redeemed during holiday
Layaway: Exempt if placed on or picked up from layaway during the holiday
Virginia Department of Revenue

The table below indicates the non-back-to-school sales tax holidays. Preparation for these holidays should be much the same as preparation for back-to-school holidays.

Sales Tax Holidays (Other Than Back-to-School)
States Purpose 2013 Dates
Alabama Hurricane Preparedness Feb. 22-24
Georgia Energy Savings Oct. 4-6
Louisiana Hurricane Preparedness May 25-26
Louisiana Hunting Season Sept. 6-8
Maryland Energy Savings Feb. 16-18
Missouri Energy Savings April 19-25
North Carolina Energy Savings Nov. 1-3
South Carolina Hunting Season Nov. 29-30
Texas Energy Savings May 25-27
Virginia Hurricane Preparedness May 25-31
Virginia Energy Savings October 11-14
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