You need to be aware of how temporary tax-free periods may impact your sales tax compliance if you plan on selling into any one of the 18 states that have a sales tax holiday for 2021, plus Puerto Rico. Sales tax holidays were once only for in-state companies. However, they can also affect online sellers who are not physically present in the state. This can lead to problems with sales tax compliance.
There are many traps you should avoid when selling into a sales tax-holiday state.
- Time for the start and the end.
- Participation options
- Qualifying products
- Prices subject to restrictions
- Exchanges and returns
- Shipping and handling
Contents
End Times
At least 31 sales tax holidays are expected to be offered by 18 states and Puerto Rico in 2021. Other states may decide to offer the same but that seems increasingly unlikely.
Summer is the peak of the sales tax holiday season. However, they can be run at any time. The first two tax-free periods of 2021 were in February. The last one will occur after Thanksgiving in New Mexico.
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Each sales tax holiday begins and ends at a particular time on a certain date. Florida’s back to school sales tax holiday starts Saturday, July 31, and ends Monday, Aug 9. The Florida Department of Revenue guidance isn’t more precise, but Virginia’s tax notice does. The sales tax holiday begins August 6 at 12.00 a.m. and ends August 8 at 11 59 p.m.
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Yes, calibrating your point-of sale systems to the minute is necessary in order to avoid incorrectly applying sales tax to qualifying transactions and exempt purchases made after the holiday ends. Once you have set the date and time for a sales tax holiday it is necessary to refine its scope.
Participation Opportunities
It is necessary to decide whether or not you are required to participate in the state’s sales tax holiday. You also need to determine if local taxes need to be collected or exempted. Finally, you will need to determine if you can absorb any tax on non-qualifying items.
Most states have sales tax holidays that are mandatory for local governments. However, a few states allow local tax jurisdictions, i.e. cities and counties, to opt out. This is the case in Alabama, Missouri and elsewhere. The Alabama Department of Revenue (Moscow Department of Revenue) publish annual lists of participating and non-participating jurisdictions. These lists can sometimes be updated at the last moment, which can make it difficult .
Many states require that all businesses participate in sales tax holidays. However, some states offer a choice. Retailers are not required to take part in the Massachusetts tax-free period, but they are allowed to participate in New Mexico’s back-to school sales tax holiday.
Iowa’s annual sales-tax holiday is mandatory for all businesses that open during it. They cannot absorb any sales tax on items not qualified. Texas, on the other hand, allows retailers to pay their sales tax instead of passing it along to customers.
Once you have determined these factors, it is time to establish point-of-sale system to exempt qualifying products.
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Qualifying Product
The Massachusetts sales tax holiday allows for temporary exemptions on most personal items. Many states are not as generous.
The theme of sales tax holidays is usually back-to-school, or emergency preparedness. Back-to-school events are exempt from tax, but school supplies and clothing are not exempt. Emergency preparation tax-free periods are exempt from tax, as are generators, batteries, and tarps.
The exemption may not be applicable to all products falling under the covered category. Raincoats, for example, are eligible for Mississippi’s sales-tax holiday. Roller blades, however, are not. Fishing vests would not be eligible if they help you float. You must also tax any item that isn’t on the all-inclusive list.
If they exceed the price limit, even qualifying items might need to be taxed.
Price Restrictions
Most sales tax holidays include price caps. A $50 dress is exempted temporarily in many states, but a $250 gown would not.
There are some exceptions to this price-cap rule. Maryland’s tax-free period to purchase energy efficient appliances is not subject to price restrictions. South Carolina’s August sales holiday and Mississippi’s sale tax holiday for ammunition, firearms, and certain hunting supplies are also exempt from these price restrictions.
Massachusetts has a very simple threshold of $2,500 for any one item of tangible personal. This is in sharp contrast to Florida where the Recreation Supplies and Admissions Sales Tax Holiday this year exempts the first 50 percent of the sale price of safety flares and the first 75 percent of the sale price of paddles.
Although it can be overwhelming, with the right knowledge (and Sales Tax Automation), it is possible to exempt sales that are not required to be exempted and tax those that should be taxed. Layaways are also included.
Layaways
Layaway policies can vary by state and depend on the terms of sale. If the item is on layaway, or the final payment is made within the tax-free period, consumers may purchase qualified items in Texas.
When a customer places a product on layaway in the tax-free week, no tax is charged to any installment payments. If the final payment for a layaway product is made before the holiday, Connecticut sales tax will be charged.
It’s easier in Mississippi. Layaway sales of eligible products don’t qualify to the temporary exemption. This could be a penance for the fact Massachusetts has given retailers only days to prepare for its sales taxes.
Shipping and Handling
Another problem is the tax policies regarding shipping and handling fees. Mississippi does not have shipping and handling fees. This doesn’t mean that they don’t impact price caps. These charges are required to be included in Florida’s sales price, as they can affect the eligibility of transactions. In fact, Florida mandates that retailers include shipping and handling costs with every shipment to “determine if an item qualifies for exemption during the sales tax holiday period.”
Increase Your Nexus Footprint
You might think that you don’t need to worry about sales taxes in states where you aren’t registered to collect or remit sales tax. You might be wrong. You can reduce your sales tax obligations through tax-free periods by expanding your nexus footprint.
A connection that allows a state or territory to impose tax collection obligations on a company is called nexus. A state’s physical presence creates nexus. Today, nexus may also be created by sales activity in a state (economical nexus). For example, $100,000 in taxable retail sales in the current year or 200 separate tax-deductible retail transactions in previous years.
States allow exceptions for businesses that sell below their economic nexus threshold. The thresholds for states vary, so you won’t be able to establish nexus with California unless you and your affiliates make $500,000 in combined sales of tangible personal properties in the preceding calendar year. After your 200th transaction, you will need to register in Arkansas. This state guide to economic nexus laws gives state-specific threshold information.
Because sales tend to pick up during holidays that are not sales tax holidays, a retailer can be able to go over the economic nexus threshold. You may be required to register with your state to start collecting sales tax for the next transaction.