Sales Tax Holidays: Boost to Economic Activity or Political Gimmick?

August 14, 2014

This week is Maryland’s back-to-school sales tax holiday, which allows consumers to purchase qualifying clothing and footwear tax-free, so long as the purchase price for the items are $100 or less.  It’s not necessarily marketed by the Comptroller as being a “back-to-school event,” but many shoppers will take advantage of the tax-free week to purchase items such as new sneakers and jeans for their kids’ upcoming school year.  Sales tax holidays have been around for over 30 years, but many question whether these temporary tax respites are sound tax policy.

Proponents of sales tax holidays claim that the programs provide benefits to low-income consumers and provide a stimulus to the economy through increased sales.  Clearly, low-income consumers are getting a tax break, albeit temporarily, but wealthier consumers making qualified purchases receive the same benefit.  In addition, low-income shoppers may not have the necessary cash on hand to time their purchases to occur during a small time period.  Further, after perusing the list of exempt items in Maryland’s program, it’s easy to find one item that most families will need to buy this time of year that is not exempt from tax under the program.  For example, backpacks are not exempt during the sales tax holiday, but you’re in luck if you looking for a new fishing vest or some lingerie, which are exempt during the holiday.  Virginia’s recent holiday did provide for an exemption for backpacks, but only if the price was $20 or less.  Good luck finding a backpack for $20.

As stated by the Tax Foundation in a report it released last year, “if a state must offer a ‘holiday’ from its tax system, it is a sign that the state’s tax system is uncompetitive.  If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.”  The Tax Foundation argues that if the goal is to help needy consumers purchase supplies during the back-to-school season, then the states should distribute sales tax vouchers for those citizens or implement some other targeted program.

With respect to sales tax holidays stimulating economic growth, the Washington Post recently cited a study that suggests otherwise.  Rather than increasing purchases, the study found that sales tax holidays merely change the timing of purchases that consumers were going to make anyway.  Thus, there may be an increase in retail activity during the holiday, but the periods before and after the holiday reveal a decrease in sales.  Further, although many retailers support sales tax holidays, these programs can create added costs for businesses such as additional tax compliance costs associated with reprogramming their sales tax systems and added complexity with respect to managing their inventory and workforce allocation.

Still, sales tax holidays remain very popular among the public – likely because it is a highly visible tax break.  So long as retailers and consumers continue to support the programs, we will have to endure a marathon of shopping for one weekend per year.  Of course, if you are shopping in Maryland, remember that the one of the most expensive items on the back-to-school shopping list, the backpack, is still subject to tax.

A detailed list of items that are exempt during Maryland’s sales tax holiday can be found here.

If you have any questions about sales and use tax please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.

About the Author: Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.