There is Nothing Simple About Sales Tax Holiday Compliance

September 24, 2015

End-of-summer sales tax holidays may be fun, helpful and welcome to consumers, but they are no picnic for the tax departments of retailers. For different periods in July and August of this year, consumers in 19 states saved money by not having to pay sales tax on certain items. It is also not a coincidence that these ‘holidays’ come just before students return to school. Depending on what state they live in, parents are able to save the tax on different items children need for the coming school year. The 19 states that have sales tax holidays are located primarily in the South and Southeast, but also include Connecticut, Massachusetts, Maryland and Puerto Rico. In addition to having special sales tax holidays throughout the year for different types of goods, all of these states have 2-4 days near the end of the summer where popular school supplies are exempt from sales tax. Moreover, in many jurisdictions, local municipalities can choose to opt in or out of participating in these annual back to school events. Depending on the state, parents can save on items such as clothing, shoes, books, and in some cases, big-ticket purchases, including computers and software. The list of exempt items can be broad or as specific as allowing Halloween costumes, diapers and bandanas, but not belt buckles. This is the case in Tennessee. Additionally, states like Louisiana and Massachusetts apply the tax holiday to the seemingly nebulous “tangible personal property,” which the Tax Foundation classifies as anything that can be touched or moved. Consumers can save on items such as appliances or furniture. Businesses are able save on expensive equipment they need for operations and some specifically wait for sales tax holidays to make such purchases. No Single Set of Rules One major challenge for retailers and their accountants is that there is no uniform way for reporting tax information and changes around the country. It takes careful monitoring of all the jurisdictions where businesses have ‘sales’ and then adjusting their ERP and sales and use tax software when sales tax holidays take place. This process can take a lot of time, energy and resources, especially since local areas can send a notification of participation just days before the holiday starts. If a transaction crosses state lines, shipping and handling is not subject to the exemption, but companies must check the rules of each state to make sure the timing in each state does not affect if the purchase qualifies. These holidays are also burdensome for online retailers, especially those who operate in several of the states that offer sales tax holidays. Since there is no uniformity in exemptions from state to state, online retailers have the added task of familiarizing themselves with individual states’ rules so that they remain compliant. The complication has not gone unnoticed and there have been attempts to standardize the rules and application of sales taxes. As reported in Accounting Today, The Streamlined Sales Tax Project was formed in 2000 and took effect in 2005. But only 24 states and the District of Columbia have signed on and the project has not achieved its desired intent or effect. Staying Compliant Means Careful Monitoring “Your state may have a sales tax holiday this year and may not have it next year, and they may require you to file it this way, or they may say, ‘Just put them in exempt sales, and if we audit you, you’ll just have support to say it was a sales tax holiday, and we’ll look at it that way. But there’s no across-the-board rule.” said Sonya Daniels, manager for CBIZ MHM, to Accounting Today. It is critical to pay attention to each state’s Department of Revenue publications in order to make sure a business remains in compliance as sales tax holiday regulations change and are published. Moreover, the traditional ‘back to school’ sales tax holiday is not the only period for sales tax holidays. Some states have other times throughout the year where retailers do not collect sales tax. For instance, in early September, Louisiana has a sales tax holiday for firearms, ammunition and hunting supplies. Georgia, Missouri, New Mexico and Texas have periods where Energy Star appliances are sales tax exempt. And Alabama, Louisiana and Virginia have periods where no sales tax is collected on hurricane supplies. Alabama and Virginia also include generators. Sales tax holidays can be a headache for retailers no matter what time of year they take place. Many tax departments file sales taxes either monthly or quarterly, though some may file annually or semiannually. Retailers’ tax departments have to stay vigilant and adjust their systems properly to correctly charge tax and also be able to account for this change if audited later. Sales associates also have to be aware as well so they know how to process the transactions correctly. Overall, sales tax holidays save consumers a little, but cost retailers a lot when it comes to ensuring taxes are accurately charged. Having an automated sales and use tax system is extremely helpful in managing these complexities.

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