7 Misconceptions About Sales Tax Holidays

By Tim Parker | August 10, 2012 AAA

It's that time of year again. Multiple states will institute sales tax holidays in 2012. During that period, consumers can make certain purchases free of sales tax. On small purchases, exempting sales tax may seem insignificant, but for those who wait until the holiday to purchase bigger ticket items or combine multiple smaller items, the savings can be significant.
The sales tax holiday isn't without limitations. Further, the limitations can be confusing and frustrating for those who fill their carts only to find that most of their purchases aren't exempt from sales tax. Here are a few things you might not know about these holidays.

SEE: 10 States With High Sales Taxes

It's Not a Federal Event
In 1997, New York was the first state to offer a sales tax holiday. Since then, only 16 other states have followed New York's lead. New York didn't like that state residents were going to neighboring states to purchase clothing tax free, so it enacted a holiday to keep residents purchasing locally.

Since sales tax is not charged at the federal level, this is not an issue for federal lawmakers. The legislative branch of each state takes up this issue and enacts differing laws concerning the event.

The Rules Aren't Consistent
Massachusetts allows residents to purchase almost anything for non-business purposes providing the item is less than $2,500. Florida only allows tax-free purchases for school supplies and clothing. Virginia's sales tax holiday in May limits purchases to hurricane preparedness supplies. You can find the limitations on your state's website.

It's Not All Sales Taxes
If you live in a locality that imposes a sales tax in addition to your state's sales tax, the local tax may not be exempt. Many cash-strapped municipalities can't afford to lose the revenue collected from these taxes. Check your city's website for details.

It's Not Only for Your Benefit
Although tax holidays are strategically placed around holidays, back to school season, and months prior to hurricane season, it's probably not as much about you as you think. Tax holidays are in place to stimulate purchasing statewide. You may not pay the sales tax, but states expect to get a portion of the money back from the revenue generated by increased sales.

Not Everybody Is a Fan
Sales tax holidays have critics. The Tax Foundation found that these holidays don't stimulate purchasing or economic growth and create compliance issues for small businesses that don't have the knowledge or resources available to them to navigate the policies. The organization found that they're used by politicians to show commitment to helping the poor.

Businesses Like It for Other Reasons
Businesses like sales tax holidays for different reasons than politicians and consumers. Large businesses pay a significant amount of money to produce weekly ads that might include a 7% savings, but the state governments do that advertising for them when the tax holiday is hyped.

Hidden Agenda
According to a Tax Foundation report, some states use tax holidays as a way to distract policymakers and taxpayers from the need for real tax reform. The report says that some states choose not to implement tax holidays because their tax policies are competitive to other states.

The Bottom Line
Sales tax holidays often take place around events like back-to-school spending, hurricane preparation and holidays. Regardless of the reason for the holiday, taking advantage of the lack of sales tax could mean a 4 or 7% discount, sometimes more. There are numerous websites that list each state and their tax holidays, or you can go to the tax section of your state's website.

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