WA provides tax guidance on the new nexus standards

An out-of-state wholesaler will have economic nexus if it has (i) more than $267,000 in gross income in Washington; (ii) more than $53,000 of payroll in Washington; (iii) more than $53,000 of property in Washington; or (iv) at least 25% of total property, payroll, or income in Washington.

Washington ~ Business and Occupation, Sales and Use Taxes: Changes to Nexus Standards Explained

The Washington Department of Revenue has provided excise tax guidance on the new nexus standards applicable to out-of-state taxpayers making wholesale sales and retail sales in Washington. Effective September 1, 2015, out-of-state businesses making wholesale sales into Washington will be liable for wholesaling business and occupation (B&O) tax on sales delivered into the state for the current year if they meet any of the economic nexus thresholds during the prior calendar year. An out-of-state wholesaler will have economic nexus if it has (i) more than $267,000 in gross income in Washington; (ii) more than $53,000 of payroll in Washington; (iii) more than $53,000 of property in Washington; or (iv) at least 25% of total property, payroll, or income in Washington. In order to determine whether a wholesaler exceeds the $267,000 threshold, both apportionable income attributable to the state and wholesale sales delivered to Washington are included.

Effective September 1, 2015, a click-through nexus standard has been adopted for retailing B&O tax and sales tax purposes. An out-of-state retailer will be presumed to have nexus with Washington if it (i) enters into agreements with Washington residents and pays a commission or other consideration for referrals via a website link or otherwise; and (ii) has more than $10,000 in sales into Washington during the prior calendar year due to these agreements. The presumption may be rebutted by showing that each in-state resident with whom the retailer had an agreement was prohibited from engaging in solicitation activities on behalf of the retailer and did not engage in such solicitation.

Tax Topics: New Nexus Standards for Wholesale and Retail Sales — Effective September 1, 2015, Washington Department of Revenue, August 18, 2015, ¶203-928

Town of Breckenridge, Vail Resorts reach lift-ticket tax accord

From the Denver Business Journal

Link: http://www.bizjournals.com/denver/news/2015/08/27/town-of-breckenridge-vail-resorts-reach-lift.html

Town of Breckenridge, Vail Resorts reach lift-ticket tax accord

Aug 27, 2015, 7:20am MDT

Ben Miller, Contributing Writer

The town of Breckenridge and Vail Resorts Inc. have reached a compromise deal

regarding a lift-ticket tax to fund transit improvements in the town.

If voters approve the plan in November, a 4.5 percent tax would be added to lift tickets at

Breckenridge, which would raise at least $3.5 million for transit improvements. The tax

would add about $6 to a Breckenridge lift ticket.

The Denver Post reported the compromise was reached after the tax plan excluded taxes on

Vail’s Epic Pass, which also includes skiing at Vail Resorts’ (NYSE: MTN) other Colorado


“In the spirit of compromise, the council felt this amount would be adequate to begin to

work on the much needed improvements for this vital issue for our community,” said

Breckenridge Mayor John Warner, in a statement.

Ben Miller contributes to the Denver Business Journal and compiles the Morning

Edition email newsletter.



Navigating SALT Nexus and Compliance for Not-for-Profits

As not-for-profit organizations expand their reach, many are unaware that they may be creating nexus in states where they have previously had a limited presence. Here’s what they need to know.

By Andrew Gray, CPA

August 18, 2015

State nexus and compliance for public charities and private foundations has been a long-standing issue, and as these not-for-profit organizations are able to expand their reach through technology and other means, state requirements for not-for-profits are also increasing. Many not-for-profits do not know that the states in which they conduct business have many rules that may apply to them.

State and local governments are actively interested in the charities that operate within their borders to ensure that the organizations’ assets are used for their intended charitable purposes and to protect their residents from being fraudulently solicited for donations. These governments are also interested in the financial gain from regulating charities. They may impose fees on the not-for-profit organizations based on their size (or other factors). In addition, if a not-for-profit organization has income from business unrelated to its exempt purpose, both the federal and state taxing authorities want to make sure they receive their share of any taxes on that income.

Not-for-profit organizations should consider the following factors before beginning any business activity within a state, to address the increased scrutiny of state and local authorities.

1.   Interested parties: The organization’s audience

Becoming compliant with the laws of state and local jurisdictions is increasingly important because of the accessibility of information to the general public. Several interested parties could be actively seeking information about the not-for-profit’s status with various states, including:

  • The IRS;
  • Foundations and donors;
  • Researchers and watchdog groups;
  • Legislators;
  • News media; and
  • State agencies and other federal agencies.

While the searching activities for the above groups are unknown, the information is available to them. In their efforts to increase revenue and protect their residents, it is probable that they would use what is readily available. In addition, the IRS and many states are sharing information about not-for-profits. Further, potential donors often use information from their state to ensure the organization is in compliance with state laws and not a fraudulent enterprise.

2.   Federal tax law requires compliance with states

Regs. Secs. 1.6033-3(c)(1) and -2(a)(2)(iv) require private foundations to furnish a copy of their annual Form 990-PF, Return of Private Foundation, to the attorney general of the following places:

  • Where the organization’s principal office is located;
  • Where the organization was created or incorporated;
  • Any state the organization reports to concerning its organization, assets, or activities; and
  • Any state where the organization has registered (or otherwise notified the state) that it intends to be (or is) a charitable organization or holder of property devoted to a charitable purpose.

While this federal requirement does not explicitly apply to public charities, if the state requires a copy of the Form 990, Return of Organization Exempt From Income Tax, the organization must comply. In fact, Form 990 contains a list of states in which the form is required to be filed.

Public charities should be careful to send only the public disclosure copy of Form 990 to the states to ensure that donor information (contained on Schedule B, Schedule of Contributors) and other sensitive information are not released to the public. States often publish the Forms 990 on a website or send copies to those who request them. Generally they do not check to be sure that a public disclosure copy was sent.

In a recent case (Center for Competitive Politics v. Harris, No. 14-15978 (9th Cir. 5/1/15)), the Ninth Circuit upheld a California regulation requiring charities that are registered to solicit contributions in the state to file a nonredacted copy of Form 990, Schedule B. California maintains it does not make Schedule B available to the public, but, even so, organizations should be aware of the potential exposure in California and the need to provide only the required copy to any other state that requests it.

3.   Regulating solicitation and annual compliance requirements

A solicitation is defined as any request for a contribution, through any medium, i.e., asking for a gift or selling goods or services. If the organization is soliciting or conducting business, it may need to register with one or more offices within a particular state. Conducting business could mean a variety of things—including solicitation, having property or employees in the state, or selling goods or services in the state. The organization will also need to renew its status annually, which might include a simple postcard filing, a tax return filing, or filing an online form describing the organization’s activities and financial information.

Some organizations may be exempt from filing with a particular state. Although the exceptions vary from state to state, exemptions often apply to religious organizations and organizations that have raised less than certain amounts in the state.

As part of the requirements to register to solicit donations, states such as North Carolina require specific disclosures on their solicitations, written acknowledgments, receipts, and advertisements. Most state disclosures let the donor know where to find financial and registration information about the organization. Note that many states also regulate fundraising professionals (professional solicitors); the rules vary by state.

It is important, once an organization registers with the state, that it maintain its annual compliance. Many states are issuing severe penalties for noncompliance. And these states are hesitant to provide relief from penalties, even to small organizations (and are sometimes prohibited from doing so by law).

4.   Sales and use tax

Tax-exempt organizations must comply with each state’s sales and use tax rules much as for-profit businesses do. The analysis to determine whether an organization has sufficient nexus to be required to collect and pay over sales taxes is the same for a not-for-profit organization as it is for a commercial business entity. In general, not-for-profit organizations collect and remit sales tax for taxable sales. For example, if an organization sells T-shirts with its logo on it, this is usually a taxable sale, and sales tax must be collected and remitted to the state where the sale takes place.

The good news is that some states provide sales tax exemptions to not-for-profits for purchases, which is a valuable tax benefit when organizations purchase supplies or other items or services. This often overlooked benefit could save qualifying organizations 5% to 9% on purchases.

5.   Unrelated business taxable income (UBTI)

According to the IRS, more than 45,000 Forms 990-T, Exempt Organization Business Income Tax Return, were filed for the 2011 tax year (IRS, Statistics of Income Division, Tax Exempt Organizations, Unrelated Business Income (October 2014)). Many not-for-profit organizations have income from activities unrelated to their exempt purpose (UBTI) or are considering engaging in those activities for additional revenue. Having income from business unrelated to an organization’s exempt purpose comes with additional state income tax compliance issues. In fact, most states conform to the federal income tax definition of UBTI and impose corporate income tax or state unrelated business income tax on state-sourced UBTI.

It is important for a not-for-profit to know whether it needs to file in a particular state. If the organization is not otherwise doing business in the state by soliciting contributions, then it should analyze whether it has income/franchise tax nexus in the state from specifically generating UBTI. If an organization is already registered with the state to solicit contributions, then it would need to apply the appropriate apportionment of UBTI to that particular state, if any, to determine whether it must file a return in that state. However, not-for-profits often have unrelated business losses, so it may be prudent to file in a particular state to preserve a loss that may be carried forward against future income. Note that even when an organization does not have UBTI, it may need to apply for exemption from certain state income and franchise taxes (e.g., North Carolina and California).

It is noteworthy to mention the complex matter of alternative investments (such as limited partnerships, real estate funds, and private-equity funds), which not-for-profits frequently use hoping for higher returns. (For a discussion of this issue, see Evans and Hall, “Are Alternative Investments Worth Their SALT for Tax-Exempt Organizations?” 46 The Tax Adviser 416 (June 2015).)

The bottom line

States are increasingly looking for more revenue and to protect their residents from fraudulent organizations by stepping up their regulation of not-for-profits. This increased attention gives not-for-profits an opportunity to further their mission through transparency while maintaining balance to provide only what is required of them. Preventive action is crucial when reviewing multistate activities and related compliance requirements. Not-for-profit organizations are well-advised to review their activities with their CPA and legal counsel to determine the requirements they must meet in each stat


The Arms Race in Sales Tax

Technology is crucial in the struggle between states and taxpayers

August 20, 2015

Though the nation is expressing cautious optimism about the economy, particularly in the second half of 2015 and thereafter, any recovery will follow the traditional pattern of helping some sectors more than others. This is particularly true of state governments, which generally have faced tougher times in the past four years due to growing social obligations and a changing business environment.

Alabama Enacts Factor Presence Nexus Standard for Business Activity

by Denis Del Bene, JD, LL.M. (RIA)

Alabama has enacted legislation establishing a factor presence nexus standard for business activity for purposes of the income tax, the business privilege tax, and the financial institution excises tax. (L. 2015, H49 (Act 505), effective for tax years beginning after 12/31/2014.)

Substantial nexus. Individuals who are residents or domiciliaries of Alabama and business entities that are organized or commercially domiciled in Alabama have substantial nexus with Alabama. Nonresident individuals and business entities organized outside of Alabama that are doing business in Alabama have substantial nexus and are subject to the income tax, the business privilege tax, and the financial institution excises taxes, when in any tax period, the property, payroll, or sales of the individual or business in Alabama exceeds certain thresholds.

Thresholds for substantial nexus. Substantial nexus is established if any of the following thresholds are exceeded during the tax period: (1) a dollar amount of $50,000 of property; (2) a dollar amount of $50,000 of payroll; (3) a dollar amount of $500,000 of sales; or (4) 25% of total property, total payroll, or total sales. At the end of each year, the Department will review the cumulative percentage change in the Consumer Price Index (CPI) and adjust the thresholds if the CPI has changed by 5% or more since January 1, 2015 or since the date that the thresholds were last adjusted. The adjusted thresholds will be rounded to the nearest $1,000. The CPI means the CPI for All Urban Consumers (CPI-U).

Pass-through entities. Pass-through entities, including, but not limited to, partnerships, limited liability companies, S corporations, and trusts must determine threshold amounts at the entity level. If property, payroll, or sales of an entity in Alabama exceeds the nexus threshold, members, partners, owners, shareholders, or beneficiaries of that pass-through entity are subject to tax on the portion of income earned in Alabama and passed through to them.

Property, payroll, and sales for purposes of the threshold. Property: Property counting toward the threshold is the average value of the taxpayer’s real property and tangible personal property owned or rented and used in Alabama during the tax period. Property owned by the taxpayer is valued at its original cost basis. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from sub-rentals. The average value of property will be determined by averaging the values at the beginning and ending of the tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer’s property.

Payroll: Payroll counting toward the threshold is the total amount paid by the taxpayer for compensation in Alabama during the tax period. Compensation means wages, salaries, commissions, and any other form of remuneration paid to employees and defined as gross income under IRC §61.

Compensation is paid in Alabama if: (1) the individual’s service is performed entirely within Alabama; (2) the individual’s service is performed both inside and outside Alabama, but the service performed outside the state is incidental to the individual’s service inside the state; (3) some of the service is performed in Alabama and: (a) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in Alabama, or (b) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual’s residence is in Alabama.

Sales: Sales counting toward the threshold include the total dollar value of the taxpayer’s gross receipts from transactions in the current period, from: (1) the sale, lease, or license of real property located in Alabama; (2) the lease or license of tangible personal property located in Alabama; (3) the sale of tangible personal property received in Alabama as indicated by receipt at a business location of the seller in Alabama or by instructions, known to the seller, for delivery or shipment to a purchaser, or to another at the direction of the purchaser, in Alabama; and (4) the sale, lease, or license of services, intangibles, and digital products for primary use by a purchaser known to the seller to be in Alabama.

If the seller knows that a service, intangible, or digital product will be used in multiple states because of separate charges levied for, or measured by, the use at different locations, because of other contractual provisions measuring use, or because of other information provided to the seller, the seller must apportion the receipts according to usage in each state. If the seller does not know where a service, intangible, or digital product will be used or where a tangible will be received, the receipts will count toward the threshold of the state indicated by an address for the purchaser that is available from the business records of the seller maintained in the ordinary course of business. If that is not known, then the receipts will count toward the threshold of the state indicated by an address for the purchaser that is obtained during the consummation of the sale, including the address of the purchaser’s payment instrument, if no other address is available.

Taxpayers subject to special apportionment methods: For a taxpayer subject to special apportionment methods, the property, payroll, and sales for measuring against the nexus thresholds will be defined as they are for apportionment purposes under those special apportionment methods and associated regulations.

Financial institutions: Financial institutions subject to an apportioned income tax must determine property, payroll, and sales for nexus threshold purposes the same as for apportionment purposes under Chapter 16 (Financial Institutions Excise Tax) of Title 40 of the Alabama Code.

Interaction with Federal Interstate Income Law (Public Law 86-272). The legislation provides that a state without jurisdiction to impose tax on or measured by net income on a particular taxpayer because that taxpayer comes within the protection of Public Law 86-272, 15 11 U.S.C. § 381, does not gain jurisdiction to impose such a tax even if the taxpayer’s property, payroll, or sales in the state exceeds a threshold. Public Law 86-272 preempts the state’s authority to tax and will therefore cause sales of each protected taxpayer to customers in the state to be thrown back to those sending states that require throwback.

Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2015


August 17, 2015

Key Findings

  • 18 states, primarily in the southeastern U.S., will hold a sales tax holiday in 2015, down from a peak of 19 states in 2010.
  • Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.
  • Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays.
  • Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating between products and across time, and distorting consumer decisions.
  • While sales taxes are somewhat regressive, this does not make sales tax holidays an effective tool for providing relief to low-income individuals. In order to give a small amount of tax savings to those with lower incomes, holidays give a large amount of savings to higher income groups as well.
  • Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. 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.

Executive Summary

Sales tax holidays are periods of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, products bearing the U.S. government’s Energy Star label, and even guns. High-tax New York State sparked the trend in 1997 as a way to discourage border shopping. In 2015, 18 states will conduct sales tax holidays, down from a peak of 19 states in 2010 (see Table 1).

At first glance, sales tax holidays seem like great policy. They enjoy broad political support, with backers arguing that holidays are a highly visible form of tax cut and provide benefits to low-income consumers. Politicians and other supporters routinely claim that sales tax holidays improve sales for retailers, create jobs, and promote economic growth.

Table 1. 2015 Sales Tax Holidays & Price Caps
State Dates Clothing School Supplies Computers Energy Star Miscellaneous
Alabama February 20-22         Generators $1,000;

Hurricane supplies $60

  August 7-9 $100 $50 $750   Books – $30
Arkansas August 1-2 $100 No Cap     Clothing accessories $50
Connecticut August 16-22 $100        
Florida August 1-3 $100 $15 $750    
Georgia July 31-August 1 $100 $20 $1,000    
  October 2-4       $1,500  
Iowa August 7-8 $100        
Louisiana May 30-31         Hurricane supplies $1,500
  August 7-8         All purchases of tangible personal property up to $2,500
  September 4-6         Firearms, ammunition, and hunting supplies (no cap)
Maryland February 14-16       No Cap  
  August 9-15 $100        
Massachusetts August 15-16         All purchases of tangible personal property up to $2,500
Mississippi July 31-August 1 $100        
  September 4-6         Firearms, ammunition, and hunting supplies (no cap)
Missouri April 19-25       $1,500  
  August 7-9 $100 $50 $3,500   Computer software: $350
New Mexico August 7-9 $100 $30 $1,000   Other Computer Hardware: $500
  November 1-3       No Cap  
Ohio August 7-9 $75 $20     School instructional material up to $20
Oklahoma August 7-9 $100        
South Carolina August 7-9 No Cap No Cap No Cap   Towels and Bedding –
No Cap
Tennessee August 7-9 $100 $100 $1,500    
Texas May 23-25       (a)  
  August 7-9 $100 $100      
Virginia August 7-9 $100 $20   $2,500 Generators $1,000; Hurricane supplies $60
Source: Tax Foundation review of state statutes and revenue department websites.
Note: Massachusetts in 2011, 2012, and 2013 passed legislation for its August sales tax holiday in early August each of those years. As of press time, the House had approved an August 16-17 holiday and the Senate had approved an August 9-10 holiday, but a final bill had not been enacted.
(a) Air conditioners up to $6,000; refrigerators up to $2,000; other Energy Star products no cap.

Despite their political popularity, sales tax holidays are based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy. They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers.

Principles of Sales Taxation

Sales taxes are a type of consumption tax, or a tax on spending on goods and services purchased by the end user. The principle underlying the use of sales taxes to fund government is that individuals should pay taxes in proportion to the benefit they receive from government spending; this idea is known as the benefit principle. Personal consumption is considered an appropriate proxy for the amount of government services consumed by an individual.

Thus, a tax on consumption is considered an equitable method of “paying” for government services.[1] Consumption also has the advantage of being relatively easy to track, measure, and tax. Many economists also prefer a consumption tax over an income tax because the former does not tax (and thereby discourage) savings.

Sales taxes in the United States are consumption taxes, but they largely exempt certain transactions such as higher education, housing, and health care. A properly structured sales tax, however, would tax all consumption by end users including services that are currently excluded.

Broadening the sales tax base while lowering the sales tax rate will mitigate both volatility in revenue collections and the economic harm caused by a high tax rate. A high tax rate increases distortions in the market and can inhibit growth by making a state less attractive for individuals and businesses.

Another important feature of good sales taxes is that they tax consumption once and only once. Business inputs, or business-to-business purchases that are used to create other products or services, should be excluded from the sales tax base. Otherwise, final products will be taxed multiple times: once (or more) during production and again when purchased by the end user. In practice, this multiple taxation unfortunately occurs in many states.

Sales taxes tend to be inherently regressive with regard to income, as low-income individuals tend to spend a greater percentage of their income in taxable sales than high-income individuals. In an effort to reduce this regressivity, items viewed as basic necessities, such as groceries, utilities, clothing, and prescription drugs, are often exempted from sales taxes in the United States. But these exemptions also benefit high-income taxpayers, while narrowing the base and necessitating a higher tax rate.

Ideally, sales tax reform would broaden sales tax bases while lowering sales tax rates, to produce a system that collects stable revenue with minimal economic distortion. Sales tax holidays are an example of the opposite—base narrowing—in that they carve out exemptions for certain transactions during certain time periods.

The History of Sales Tax Holidays

Ohio and Michigan enacted the first sales tax holidays in 1980 when they offered tax holidays for automobile purchases. But it was New York that sparked the modern trend, with the first sales tax holiday for clothing in 1997. New York’s objective was to tackle border shopping, the phenomenon of residents traveling to nearby states to take advantage of lower sales tax rates (particularly clothing purchases in New Jersey). The sales tax holiday gave hope of reducing border shopping without the need of actually having to reduce the state’s sales
tax rate.

While sales tax holidays are often defended on grounds of economic benefits, in reality, a key motivation has been attempting to stop cross-border shopping, and perhaps even lure shoppers from other states. In 2005, Massachusetts adopted an extremely generous weekend sales tax holiday applying to all goods up to $2,500, attempting to stop Bay State residents from shopping in next-door New Hampshire, which has no sales tax.[2] In 2009, Massachusetts temporarily abandoned the holiday as it raised its sales tax even further, from 5 percent to 6.25 percent.

Since the inception of sales tax holidays, many states have created them around certain products and industries.[3] In 2015, 18 states will hold clothing sales tax holidays, 11 states will have school supplies sales tax holidays, seven states will have computer sales tax holidays, and six states will have Energy Star products sales tax holidays. Altogether 18 states will conduct a holiday, one fewer than in 2010. (See Tables 2 and 3 for a chronicle of sales tax holidays.)

Table 2. State Sales Tax Holidays, 1997–Present
State Items Days Date Years
Alabama Hurricane supplies 3 Early February (2013), July (2012) 2012-2015
  Clothing, computers, school supplies books 3 Early August 2006-2015
Arkansas Clothing, school supplies 2 Early August 2011-2015
Connecticut Clothing, footwear 7 Mid August 2000-2015
  Energy Star appliances 3 months June-September 2007
Florida Clothing, footwear, books and school supplies (beginning in 2004) 7-9 (2004-2009),

2 (2010-2011)

End July (2004-2009)

Mid/early August (2010)




  Emergency supplies 12 Late May/early June 2005-2007 2014
  Energy Star appliances 7 Early October 2006, 2014
Georgia Clothing, footwear, books, school supplies, and computers 4 Late March (2002), early August 2002 (twice), 2003-2009,
  Energy Star appliances 4 Early/mid October 2005,
2007-2009, 2012-2015
Illinois Clothing, footwear and school supplies 10 Early/mid August 2010
Iowa Clothing, protective equipment, select sports equipment 2 Early August 2000-2015
Louisiana Tangible personal property, first $2,500 2 Mid December,
Early August in 2010
  Hurricane supplies 2 Late May 2008-2015
  Firearms 3 Early September 2009-2015
Maryland Clothing, footwear 5-7 Mid/late August 2001, 2006, 2010-2015
  Energy Star appliances 3 Mid February 2011-2015
Massachusetts Tangible personal property under $2,500 1-2 Mid August 2004-2008, 2010-2015
Mississippi Clothing, footwear 2 Late July/early August 2009-2015
  Firearms 3 Early September 2014-2015
Missouri Energy Star appliances 7 Late April 2009-2015
  School supplies, computer software and hardware, clothing and footwear (beginning in 2005) 3 Early/mid August 2004-2015
New Mexico Clothing, footwear, computers, school supplies 3 Early August 2005-2015
North Carolina Clothing, school supplies, computers, educational, software, sports equipment 3 Early August 2002-2013
  Energy Star appliances 3 Early November 2009-2013
New York Clothing, footwear 7 Mid January 1997-2000, 2004-2006
  Clothing, and footwear (beginning in 1998) 7 September, first week 1997-1999, 2003-2005
Oklahoma Clothing, footwear 3 Early August 2007-2015
Ohio Clothing, school supplies 3 Early August 2015
Pennsylvania Personal computers 8 Mid August (2000, 2001),
mid February (2001, 2002)
2000, 2001 (twice), 2002
South Carolina Clothing, footwear, school supplies, computers, printers, software, various bath supplies and bed linens 3 Early August 2000-2015
  Most purchases 2 Late November 2006
  Firearms 2 Late November 2008-2010
Tennessee Clothing, school supplies, computers 3 Early August 2006-2015
  Clothing, school supplies, computers 3 Late April 2006-2008
Texas Clothing, footwear 3 Early/Mid August 1999-2015
  Energy Star appliances 3 Late May 2008-2015
Vermont Computers 3 Mid August (2003, 2004),
mid October (2004)
2004 (twice)
  Tangible personal property 1-2 Mid July (2008), late August (2009), Early March (2010) 2008-2010
  Energy Star appliances 7 Mid July 2009
Virginia School supplies, clothing, footwear 3 Early August 2006-2015
  Energy Star appliances 4 Early October, Early August (2015) 2007-2015
  Hurricane supplies 7 Late May, Early August (2015) 2008-2015
West Virginia Clothing, footwear, school supplies, computers, educational software 3 Early August 2002-2004
  Energy Star appliances 7; 3 months in 2009 and 2010 Early September;

September 1 – November 30, 2009-2010

District of Columbia School supplies, clothing, footwear 9-10 Early/mid August 2001-2002, 2004-2008
  Clothing and shoes 9-10 Late November 2001, 2
Source: Federation of Tax Administrators; Adam J. Cole, Sales Tax Holidays, 1997-2007: A History, 47 State Tax Notes 1001 (March 2008); Ala. Code § 40-23-210 et seq.; Ark. Code § 26-52-444; Conn. Gen. Stat. § 12-407E; Ga. Code § 48-8-3(75); Iowa Code § 423.3(68); La. Rev. Stat. § 47:305.54; Md. Code, Tax-Gen. § 11-228; Miss. Code § 27-65-111(Bb); Mo. Rev. Stat. § 144.049; N.M. Stat. § 7-9-95; N.Y. Tax Law § 1115(30) (Repealed); N.C. Gen. Stat. § 105-164.13C; Okla. Stat. tit. 68, § 1357.10; 72 Pa. Cons. Stat. § 7204(58) (Repealed); S.C. Code § 12-36-2120(57); Tenn. Code § 67-6-393; Tex. Tax Code § 151.326, 151.327; Va. Code § 58.1-611.2; W. Va. Code § 11-15-9G; D.C. Code § 47-2005(32A) (Repealed). Florida did not codify its 2011 sales tax holiday. See H.b. 143, 2011 Leg. (Fla. 2011).
*Massachusetts enacted its 2013 sales tax holiday after press time, bringing the total number of sales tax holiday states in 2013 to 18.
Table 3. Summary of States with a Sales Tax Holiday
1980 2 (MI, OH)
1981-1996 None
1997 1 (NY)
1998 2 (FL, NY)
1999 3 (FL, NY, TX)
2000 7 (CT, FL, IA, NY, PA, SC, TX)
2001 7+DC (CT, DC, FL, IA, MD, PA, SC, TX)
2002 8+DC (CT, DC, GA, IA, NC, PA, SC, TX, WV)
2003 9 (CT, GA, IA, NY, NC, SC, TX, VT, WV)
2004 12+DC (CT, DC, FL, GA, IA, MA, MO, NY, NC, SC, TX, VT, WV)
2005 12+DC (CT, DC, FL, GA, IA, LA, MA, MO, NM, NY, NC, SC, TX)
2006 15+DC (AL, CT, DC, FL, GA, IA, MD, MA, MO, NM, NY, NC, SC, TN, TX, VA)
2007 15+DC (AL, CT, DC, FL, GA, IA, LA, MA, MO, NM, NC, OK, SC, TN, TX, VA)
2008 16+DC (AL, CT, DC, GA, IA, LA, MA, MO, NM, NC, OK, SC, TN, TX, VT, VA, WV)
2009 16 (AL, CT, GA, IA, LA, MS, MO, NM, NC, OK, SC, TN, TX, VT, VA, WV)
2010 19 (AL, CT, FL, IL, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VT, VA, WV)
2011 17 (AL, AR, CT, FL, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VA)
2012 18 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VA)
2013 18 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VA)
2014 17 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, OK, SC, TN, TX, VA)
2015 18 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, OH, OK, SC, TN, TX, VA)
Source: Tax Foundation; Federation of Tax Administrators; state websites.

A number of states have tried sales tax holidays and then cancelled them, a trend that has accelerated during the current recession and related state government revenue downturn. Florida and Maryland cancelled their holidays after 2007 (but have reinstated them since). Massachusetts cancelled its 2009 holiday after it hiked its sales tax, but reinstated it at the last minute almost every year since. In 2009, the District of Columbia, faced with declining revenue and a widening budget shortfall, announced the one-year suspension of its August sales tax holiday only weeks before it was scheduled to occur, later repealing it permanently. Meanwhile, Florida, having skipped holidays in 2008 and 2009, returned to having a tax holiday starting in 2010. North Carolina, in July 2013, approved legislation ending future sales tax holidays, using the revenue instead for broad-based tax relief.

Many other localities, counties, towns, and even individual vendors, have opted out of their state’s sales tax holidays.[4] As noted tax scholar John Mikesell has put it, “State lawmakers are in the position of making a politically attractive decision with the cost of that decision being borne by someone else (local lawmakers), [a] condition[ ] ripe for poor policy choices.”[5]

Sales Tax Holidays Do Not Promote Economic Growth

Supporters claim that sales tax holidays stimulate the economy. They argue that, first, individuals will purchase more of the exempted goods than they would have in the absence of a holiday, and second, consumers will increase their consumption of non-exempt goods through “impulse” purchases, paying taxes that would otherwise not have been collected.

Rather than stimulating new sales, sales tax holidays simply shift the timing of sales. In 1997, the New York Department of Taxation and Finance studied its clothing sales tax holiday and found that while sales of exempt goods rose during the holiday, overall retail sales for the year did not increase.[6] On the contrary, shoppers waited until the holiday to purchase exempted goods, thereby slowing down sales in the weeks prior to and following the holiday. A University of Michigan study looking at computer purchases during sales tax holidays found that timing shifts “account[ ] for between 37 and 90 percent of the increase in purchases in the tax holiday states over [a] 30-week horizon,” depending on price caps and particular products.[7] Anecdotal evidence from other states supports these conclusions.[8]

Other evidence suggests that sales tax holidays attracted cross-border sales only when other states did not have their own holidays, which is no longer the case. Peter Morici, an economist with the University of Maryland, told the Washington Examiner in 2006 that a sales tax holiday “has to be a novelty to be a measurable success and it’s no longer.”[9] As the costs of squeezing a disproportionate number of sales into a short period of time have become clear, evidence suggests that fewer shoppers participate.[10] For the vast majority of those who shop during sales tax holidays, the holiday simply provides a modest windfall, or unexpected benefit, for doing something they would have done anyway.

“Impulse” purchases occur whenever consumers shop, and if consumers merely shift their purchases into a tax-free period, as the evidence suggests, their “impulse” purchases during a sales tax holiday are likewise shifted from other time periods. The increase in tax revenue would be far outweighed by the lost revenue from the much larger amount of tax-free purchases. It is therefore unlikely there is a net revenue gain from additional “impulse” purchases. And even if the “impulse” argument were true and consumers are essentially tricked into making extra unnecessary taxable purchases, that would contradict the argument that sales tax holidays are designed to provide a tax cut for consumers.

Job creation is a frequent argument in support of sales tax holidays. But this argument suffers from the same problems as the argument based on general economic growth. Any increase in employment will be modest and temporary, limiting the benefits. Temporary increases in labor associated with sales tax holidays are costly for businesses, more so than an equivalent increase spread over the whole year, because of the fixed cost associated with hiring and training multiple temporary employees. By focusing on encouraging a few days of temporary employment during sales tax holidays, lawmakers lose sight of and undermine policies that promote long-term economic growth and job creation.

Recent budget difficulties have prompted some states and localities to cancel or opt out of their sales tax holidays. The District of Columbia Office of Taxation and Revenue estimated that it would save $640,000 in tax revenue by canceling its sales tax holiday in 2009.[11] After eight years of sales tax holidays, District tax officials found the holiday did not spur enough economic growth to offset the costs. Other states would be wise to follow DC’s lead and re-evaluate the costs and benefits of sales tax holidays.

Sales tax experts and economists widely agree that there is little evidence of increased economic activity as a result of sales tax holidays.[12] Politicians claim that sales tax holidays largely pay for themselves through increased economic activity and new collections. But experience shows that the claims of economic stimulus, increased revenue, and consumer savings are greatly exaggerated. States see little net economic activity as a result of sales tax holidays; the holidays instead represent a costly-to-administer revenue loss for the government.

Sales Tax Holidays Discriminate Arbitrarily Between Products

Sales tax holidays usually only apply to a specific list of products, such as school supplies, sports equipment, clothing, or computers. The number of categories has expanded in recent years to specific appliances, hurricane preparedness supplies, and even firearms. Restaurant owners in Massachusetts have even pushed for a prepared food sales tax holiday.[13] These lists are a product of political forces. Politicians single out specific populations or industries and bestow targeted tax breaks on them. Such discrimination between products distorts consumer spending and reduces market efficiency by favoring certain products over others.

For example, the New Mexico sales tax holiday exempts computer microphones but not headsets, blank painting canvases but not dry erase boards, and backpacks but not duffel bags. Many states exempt backpacks during their “back to school” sales tax holidays even though a student may prefer to purchase a comparably priced messenger-style bag or duffel bag which accomplish the same functional goal but are not tax-exempt. The sales tax holiday raises the price of these items relative to the backpack and so the student is influenced to purchase the backpack. Though she saves a little money on the purchase, she ends up with a less suitable product that she would not have purchased in the absence of the holiday.

Likewise, a low-income elderly or childless couple may not have a need for school supplies, a computer, or sports equipment, but presumably they are as deserving of tax cuts as a consumer purchasing any of the exempt products. Using the tax code to discriminate between products can easily translate into discrimination between certain types of consumers, driving sales taxes further away from the ideal policy based on the benefit principle.

While it is true that consumers always face these cost-benefit tradeoffs in the market, tax policy should avoid adding unnecessary and discriminatory market distortions. In general, political efforts to manipulate the economy make markets less efficient by influencing consumers, retailers, and manufacturers to consume, sell, and produce more or less of a product than they otherwise would. While the economic costs of these distortions may be difficult to measure, they are real and economically damaging.

The fact that most sales tax holidays impose a price limit on the goods that are exempt only worsens the economic distortions. This encourages consumers to purchase cheaper goods over more expensive goods during sales tax holidays, even if they would prefer an item of better quality or suitability. Consumers should make consumption decisions for economic reasons, not tax reasons.

Sales Tax Holidays Can Mislead Consumers about Savings

Large retailers are often the biggest supporters of sales tax holidays. Given that they are the beneficiaries of free marketing for what is essentially a modest 4 to 7 percent sale, and that the mad customer rush in a short time allows them to raise prices, this is not surprising. Policymakers should not be convinced that a sales tax holiday is a good idea just because retailers support it.[14]

As weeks or months of sales cram into a weekend or a week, demand rises dramatically during sales tax holidays. Because the amount of inventory a retailer can have on hand is finite, many retailers understandably respond by raising prices rather than running out of stock too quickly. When lawmakers create sales tax holidays, the assumption is that the benefit will be passed on to consumers in the form of lower prices. In reality, retailers often absorb those benefits for themselves.

For example, assume a pair of shoes costs $50, and with tax the total comes to $53. During a sales tax holiday, the shoes are exempt from the sales tax, so the consumer would expect to pay $50. But if the shoes are in high demand due to crowds turning out for the sales tax holiday, a retailer may have to raise the price or risk running out of stock too quickly. If he raises the price to $51 or $52, he absorbs a large share of the savings that are intended to go to the consumer.

Researchers at the University of West Florida studied the price effect of Florida’s sales tax holiday in 2001.[15] Using ten different types of apparel across ten retail locations, data was collected over a three-week period to analyze whether before-tax prices were comparable before, during, and after the sales tax holiday. Based on the prices observed in Pensacola before the sales tax holiday, it was expected that shoppers would save $125.58 during the holiday on a representative basket of $1,674.41 worth of consumer goods. Due to changes in the before-tax price of the various products, actual savings observed during the holiday were $100.06. In short, retailers absorbed up to 20% of the benefit of a sales tax holiday, significantly reducing the benefit that consumers received. Their study is not conclusive for all tax holidays, but it strongly suggests uncertainty about how much consumers actually benefit from sales tax holidays.[16]

There is even evidence that the prices consumers pay during holidays may exceed the prices during other times of the year, even after accounting for the tax savings. A reporter in Charlotte, North Carolina, found that consumer price savings were better at six large stores in the week before the 2009 tax holiday than during it.[17]

Indeed, this seems to be a perverse effect of sales tax holidays: the more consumers they turn out, the more demand goes up, and the more prices rise.

Sales Tax Holidays Cause Costly Complexity and Instability

Tax codes should be as simple as possible. Tax complexity means additional tax compliance costs. Because of their impacts on labor allocation and inventory management, sales tax holidays add complexity to sales taxes and are accompanied by administrative costs which can place a large burden on businesses. This extra burden represents a real cost to businesses, particularly small businesses, as valuable resources are diverted to pay for compliance with and implementation of sales tax holidays.

Businesses must reprogram their registers and computers to ensure they are in compliance with the temporary tax changes. Most states, for instance, prohibit stores from advertising that they will pay the sales tax on a purchase for the consumer; during a sales tax holiday, what is normally prohibited becomes mandatory. Lawmakers are likely to be under strong political pressure to provide ever expansive exemptions, and businesses are required to track and comply with these year-to-year law changes. These costs are especially high for small businesses without the overhead to dedicate employees to tracking these changes and ensuring compliance.[18]

Sales tax holidays force businesses to operate under more than one set of sales tax laws each year. These include non-intuitive and sometimes absurdly minute regulations about the holiday’s operation. For example, Mississippi’s sales tax holiday regulations prohibit the sale of individual shoes (evidently done as a way to get under the holiday price cap), permit the use of coupons, prohibit layaway sales but permit rain checks, and exclude shipping costs from the holiday.[19] Virginia’s sales tax holiday permits layaway sales and rain checks, does not permit rebates to lower the sales price, and excludes shipping but includes handling.[20] South Carolina subjected layaway sales to tax during its holiday.[21] Texas exempts layaway sales as well as shipping, handling, and even installation costs as part of its Energy Star product tax holiday.[22]

Vermont’s sales tax holiday for computer purchases in 2004 applied to keyboards and mice but not printers, unless purchased as part of a bundled package, with the enigmatic caveat that “(1) the package is sold for $4,000 or less and (2) the most common selling price of items that would be taxed if charged separately is not more than $250 or 15 percent of the selling price of the package, whichever is greater.”[23] Pennsylvania’s 2000 holiday taxed computer accessories, but they became exempt for the 2001 holiday, even when not purchased with a computer.[24]

Virginia’s hurricane preparedness holiday is ostensibly to help consumers stockpile needed supplies, but the list there is arbitrary as well.[25] Cell phone chargers are exempt, but laptop chargers are not. Duct tape is exempt but not masking or electrical tape. What some states include is somewhat unusual. South Carolina included “bath wash clothes, blankets, bed spreads, bed linens, sheet sets, comforter sets, bath towels, shower curtains, bath rugs and mats, pillows, and pillow cases” in its general sales tax holiday.[26] Virginia includes “clerical vestments” in its definition of clothing, along with suspenders (listed twice).[27]

Besides the complexities of preparing for the sales tax holiday, businesses will have to deal with a distortion in consumer spending as shoppers shift their buying patterns to coincide with sales tax holidays. The increased activity during sales tax holidays may be accompanied by the need to hire temporary workers or pay their employees overtime compensation, as previously noted. But because this increase in consumption is largely a result of consumers shifting the timing of purchases, the result is simply a loss in efficiency for businesses without an overall boost in sales.

One retail establishment respondent in a 2015 survey of Massachusetts Retailers Association members said, “The sales tax holiday has created more problems than benefits for us. Business is nonexistent three weeks before and two weeks after. As a result, five weeks of business are crammed into two days, and the total amount of sales does not come close to five normal weeks of summer business.”[28]

Instability in tax law is costly to the economy not only because of complexity but also because it disrupts the plans and expectations of consumers and businesses. Not every state codifies its sales tax holiday in law; some instead pass a new bill establishing it each year. Florida alternated between having a holiday, not having one, and now having one again.[29] New York did the same. Even states that have codified them can suspend them. Washington DC’s last-minute cancellation of its 2009 sales tax holiday created more costs and left everyone involved uncertain.[30] The sudden change meant businesses had to change their pricing systems and registers yet again.

Lawmakers should avoid creating temporary tax laws like sales tax holidays. From the perspective of a business trying to operate at maximum efficiency, the extra administrative and labor costs associated with a sales tax holiday are an unjustifiable burden, considering the unlikelihood that sales tax holidays increase overall sales. Instead of creating a subset of tax laws that apply only temporarily and then creating ambiguity about whether those very laws will even be implemented on a year-to-year basis, lawmakers should focus on enacting real and permanent tax relief.

Sales Tax Holidays Discriminate across Time

There is little economic justification for why a product purchased during one time period should be tax exempt while the same product purchased in another time period should be taxable.[31] Experience with sales tax holidays shows that consumers will wait until a holiday to purchase the same goods they would have purchased earlier in the year. But purchases in one time period are no more beneficial to the economy, all else being equal, than purchases in another time period.

Time discrimination also has serious negative consequences for some consumers and businesses. Some consumers may be unable to shop during the sales tax holiday because they’re working, are out of town, or are between paychecks. Presumably they are no less deserving of a tax break than consumers who can shop during the holiday, but the nature of the timing leaves them out.

Sales tax holidays result in government influencing consumers to change when they purchase goods, but in some cases, it might not be wise for consumers to put off the tax-free purchases until the holiday. (For example, it may not be the best idea to wait until the weekend before school begins to buy school supplies.) For others, it might be wiser to wait until after the holiday. For example, scholars Richard Hawkins and John Mikesell describe a working class family that puts off repairing its only car so that it can take advantage of the holiday, or a single, low-income mother who runs up her credit card during the August tax holiday to buy winter coats for her children.[32]

Such government manipulation of consumer timing decisions is unwarranted and economically damaging. Experience shows that political decisions about holiday scheduling and product selection are often arbitrary and sometimes wholly unpredictable. Distorting consumer behavior with sales tax holidays is frequently not to consumers’ benefit.

Sales Tax Holidays Are Not an Effective Means of Relief for Low-Income Consumers

Some supporters claim that sales tax holidays provide tax relief to the working poor. However, sales tax holidays are an inefficient way to achieve that purpose. Because sales tax holidays only provide a benefit for a short time, low-income consumers who may not be able to shop during the designated time for cost, mobility, or timing reasons cannot enjoy the benefits of the holiday.

Sales tax holidays provide savings to all income groups, not just low-income individuals. People of every income level can and do buy goods during sales tax holidays. If the purpose of sales tax holidays is to make school supplies and clothes cheaper for low-income individuals, then a 4 to 7 percent price reduction for all consumers, but only for a brief period, is an odd and ineffective way of achieving that. It’s an example of politicians using a fire hose when a garden hose will do a better job.

If the citizens of a state determine that there truly is a legitimate need to help low-income consumers obtain particular products, a more targeted and effective approach could be a rebate or voucher program. Such a program would be administratively similar to existing food stamp programs and would only be available to the needy, avoiding a windfall for higher-income consumers. A rebate or voucher should make benefits available to low-income consumers regardless of when they shop. The poor would receive real benefits, while society avoids the economic distortions and burdens associated with sales tax holidays.

If policymakers genuinely want to save money for consumers, then they should cut the sales tax rate year-round. While the rate reduction may be modest, such a change would put the same money back in taxpayers’ hands without the distortions and complications associated with a sales tax holiday. For example, applying the revenue loss from a 2008 New Jersey tax holiday proposal could reduce the state’s sales tax rate from 7 percent to 6.6 percent year-round.[33] If tax relief for consumers looks good for a few days, why not give it to them all year long?

Sales Tax Holidays Are Not Real Tax Cuts and Distract Policymakers and Taxpayers from Tax Reform

Some sales tax holiday advocates support them as a way of giving revenue back to taxpayers. However, if the ultimate policy goal is reducing government involvement in individual and market decisions, sales tax holidays are a poor choice due to their complexity, administrative burdens, distortions, and arbitrary government micromanaging. As scholars Hawkins and Mikesell put it, sales tax holidays are highly intrusive, going so far as to call them “a Soviet-style state-directed price reduction on items selected by the state….”[34]

Because states must balance their budgets, and because states rarely, if ever, cut spending to offset the revenue loss from sales tax holidays, the net result is that tax rates must rise elsewhere, now or in the future. Pushing for a sales tax holiday without associated spending cuts means that the government will have to raise revenue from other sources, creating even more complexity in the tax code.

Looking only at tax collections provides an incomplete picture of the economic damage caused by sales tax holidays. One must also look at the harmful effects of discrimination between different products and time periods, burdensome administrative and complexity costs on businesses, distortions of consumer behavior, and economically damaging uncertainty about tax policy. Real reform—broadening sales tax base and lowering sales tax rates—can achieve desired revenue collection levels without these costs. Going further to eliminate the sales tax year-round for all consumers is another option to reduce negative effects.[35]

Tax holidays are a gimmick that distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. Their creation came about as a way to avoid addressing the negative effects of high sales taxes. Politicians often receive favorable media attention for pushing for these short-sighted policies, denigrating the hard work of those who support genuine tax relief.


Sales tax holidays have enjoyed political success, but recently policymakers are reevaluating them. Rather than providing a valuable tax cut or a boost to the economy, sales tax holidays impose serious costs on consumers and businesses without providing offsetting benefits.

Taxes should raise revenue, not micromanage a complex economy by picking winners and losers in the market. Lawmakers should aim to raise the necessary revenue in the least economically distortionary and destructive way. To achieve this goal, sales taxes should be neutral toward products and timing decisions: all end-user goods and services should consistently be subject to the same sales tax. Narrowing the tax base, by contrast, is likely to lead to higher and more damaging taxes elsewhere.

Sales tax holidays neither promote economic growth nor increase purchases. They create complexities for all involved, while inserting the political process into consumer decisions. By distracting high-tax states from addressing real problems with their tax systems, holidays undermine efforts to provide legitimate relief to consumers in general and low-income individuals in particular. Sales tax holidays are no part of sound tax policy.


[1] See generally Nicolas Kaldor, An Expenditure Tax, Allen and Unwin, London, 1955.

[2]    In response, New Hampshire launched a $40,000 ad campaign emphasizing the number of days each state has with no sales tax (“New Hampshire: 365, Massachusetts: 2”). See Alicia Hansen, New Hampshire’s 365-Day Sales Tax Holiday, Tax Foundation Tax Policy Blog, Aug. 4, 2005,

[3]    Not included in our list are Ohio and Michigan’s 1980 sales tax holiday for car purchases, nor four gas tax holidays adopted between 2000 and 2005 (Florida, Georgia, Illinois, and Indiana). For information on state gas tax holidays, see Jonathan Williams, Paying at the Pump: Gasoline Taxes in America, Tax Foundation Background Paper No. 56, at 14-16, Oct. 2007.

[4]    See, e.g., Alabama Department of Revenue, Local Governments That Have Notified the Department Regarding Participation, http://www.ador.state.al.us/salestax/STholiday.htm (listing 59 localities that have opted out of the state sales tax holiday); Missouri Department of Revenue, Back to School Sales Tax Holiday—Cities Opting Out, http://dor.mo.gov/tax/business/sales/taxholiday/school/cities.php (listing 172 cities that opted out of the state sales tax holiday); Larayne Brown, Shoppers throng to state’s sales tax holiday, Jackson Clarion-Ledger, Aug. 1, 2009. (“Kathy Waterbury, spokeswoman for the [Mississippi] State Tax Commission, has gotten reports that some retailers weren’t participating in the event.”). However, in most states with sales tax holidays, retailer participation is not optional.

[5]    John L. Mikesell, State Sales Tax Holidays: The Continuing Triumph Of Politics Over Policy, 41 State Tax Notes 107, 112, July 10, 2006.

[6]    New York Department of Taxation and Finance, The Temporary Clothing Exemption, at 23, Nov. 1997, http://www.tax.ny.gov/pdf/stats/policy_special/clothing/1997/1997_temporary_clothing_exemption.pdf.

[7]    Adam J. Cole, Christmas in August: Prices and Quantities During Sales Tax Holidays, at 23, May 2009. In a separate paper, Cole suggests the shifts are short-term ones, finding “no evidence that purchases are shifted across months to exploit the tax holiday in sufficient amounts to impact tax collections in months preceding or succeeding the month of a tax holiday.” Adam J. Cole, The Fiscal Impact of Sales Tax Holidays, at 3, May 2009.

[8]    See, e.g., Jenny Kincaid Boone, Virginia’s Sales Tax Holiday: Just The Icing On The Cake, Roanoke Times, Aug. 5, 2009 (“Larie Thompson…decided to get a head start on the sales tax holiday. She took her two daughters to the Bonsack Wal-Mart to scout out school deals, but she planned to wait until the tax-free weekend to buy them.”); Emilie Bahr, New Orleans Merchants Hope Sales Tax Holiday Brings Boost, New Orleans Citybusiness, Aug. 3, 2009 (“At The Garden Gate on Old Metairie Road, for example, manager Sara Draper said some customers will select a fancy fountain or bench but wait to swipe their credit cards until they can get the item during the tax-exemption period.”); Louis Llovio, Sales-Tax Holiday On School Supplies Starts Friday, Richmond Times-Dispatch, Aug. 2, 2009 (“Diane Parnell, who was shopping with Reason at the Target on Midlothian Turnpike last week, said she will do some shopping before the tax holiday begins, but will wait until the weekend to buy most of the supplies on her children’s list.”); LaTina Emerson, Georgia’s Sales Tax Holiday Starts Thursday, Augusta Chronicle, Jul, 29, 2009 (“Robyn Linen of Grovetown was shopping at Target…. She usually waits until the holiday so she can save money, she said.”); Emma Brown, Shoppers Go For The Gold On Tax Holiday, Boston Globe, Aug. 17, 2008 (“We’re going to come back again tomorrow’ for a stove, said Mariam Haddad of Somerville, who waited until this weekend to buy a crib for her day-care business and a digital camera for her 14-year-old daughter.”). The Tax Foundation has also received calls from individuals asking about the likelihood of their state conducting a sales tax holiday, with the caller’s intent being to postpone purchases if a holiday occurs. See, e.g., Josh Barro, Even Proposing a Sales Tax Holiday Creates Instability, Tax Foundation Tax Policy Blog, Oct. 21, 2008, http://www.taxfoundation.org/blog/show/23803.html.

[9]    Dena Levitz, Sales tax holiday returns to Maryland, Washington Examiner, Aug. 23, 2006.

[10]  See, e.g., Mary Worrell, Sales Tax Holiday A Bust For Some Retailers, Hampton Roads Business Journal, Aug. 13, 2007 (“Zenisek spent money advertising the tax-free weekend in area publications and had more employees in-store anticipating an influx of traffic, which she never saw.”); Mark Albright, Sales Tax Holiday’s Appeal May Be Slipping, Tampa Bay Times, Aug. 2, 2007 (“I’m done,’ proclaimed the Largo nurse and mother of three during a recent outing at Target, ‘I shop the sales year round for real deals. I’m trying to be more practical. I won’t be fighting crowds for the small savings during the sales tax holiday.’”); Jenny Munro, Budget-Conscious Shoppers Welcome Sales Tax Holiday, Greeneville News, Aug. 5, 2009 (“Mel Lester, who was shopping for summer shorts for her two children, said she probably wouldn’t shop on the sales tax holiday weekend. ‘You don’t save enough to make it worth fighting the crowds,’ she said.”); Christel Phillips, Many East Texans Not Waiting For Tax Free Weekend To Shop, KTRE (Lufkin, TX) (“‘Parents tend to do it two weeks in advance,’ said Maria Hernandez, a JC Penny store manager. She says many parents don’t want to take a risk when school is just around the corner…. Some store managers recommend shopping before the tax free weekend to avoid missing out on items that could be out of stock.”).

[11]  See, e.g., Micah Cohen, A True Cause for Celebration: DC Cancels Sales Tax Holiday, Tax Foundation Tax Policy Blog, July 22, 2009, http://www.taxfoundation.org/blog/show/24902.html.

[12]  See, e.g., David Brunori, The Politics of State Taxation: Dumber Than a Bag of Hammers, 2001 State Tax Notes 48-63, Mar. 12, 2001. After listing many of the flaws of sales tax holidays and citing scholars on left and right, Brunori colorfully writes that sales tax holidays are “dumber than a bag of hammers.”

[13]  See Kendall Hatch, Restaurants Seek Their Own Tax Holiday, Taunton Gazette, Feb. 7, 2011. See also S.B. 1528, 2011 Leg. (Mass. 2011).

[14]  In December 2008, as interest groups of all kinds sought a piece of federal stimulus proposals under consideration, a group of large retailers pushed Congress to adopt three nationwide sales tax holidays for 2009. See, e.g., Ann Zimmerman, Retailers Want In on Stimulus Plan, Wall Street Journal, Dec. 24, 2008. The group stated its proposal would be stimulative, and pointed to a survey that 82 percent of consumers favored a sales tax holiday and that 69 percent said they would make purchases they otherwise wouldn’t make. That consumers support receiving benefits when no costs are explained to them shouldn’t be surprising. The economic evidence from various studies provided in this report undermines the idea that many additional purchases would occur, especially in a recession.

[15]  See Richard Harper, et al., Price Effects Around a Sales Tax Holiday: An Exploratory Study, 23 Public Budgeting & Finance 108-113, 2003.

[16]  The University of Florida researchers noted that prices also rose in nearby Mobile, Alabama, suggesting that some of the price increase occurred for reasons other than the sales tax holiday. Cole found in his study of computer prices during sales tax holidays that the holiday induced retailers to raise prices of inexpensive laptop computers but lower prices of inexpensive desktop computers. See Cole, Christmas in August, supra note 6. Additionally, scholars Richard Hawkins and John Mikesell note that retailers’ ability to raise prices are more constrained during recessions. See Richard R. Hawkins & John L. Mikesell, Six Reasons to Hate Your Sales Tax Holiday, 2001 State Tax Notes 801-803, Mar. 7, 2001. Further research analyzing price effects before and during sales tax holidays would be valuable.

[17]  See, e.g., Michael Handy, Sales Tax Holiday Not All It’s Cracked Up To Be, WBTV (Charlotte, NC), Aug. 3, 2009 (“If you looked at the fine print in Sunday’s newspaper advertisements, you may have noticed some of the best sale prices will end several days before tax-free weekend. In fact, JC Penney started a huge sale on Sunday which ends Tuesday. For example, Levi Jeans are marked down to $32.99 which is $11 cheaper than the normal price. If you wait for the sales tax holiday, you will pay the full price of $44 and save only $3 in taxes. Belk is also offering some of its best prices from now until Tuesday, including an extra 15 percent off all home purchases. Remember, you will save only seven percent if you wait for tax-free weekend. Some retailers are honoring their discounts for at least part of the sales tax holiday. Office Depot, Best Buy, Target and Sports Authority are running their biggest sales from now through Saturday. In these cases, you are better off waiting until the weekend.”). See also David Brunori, The Politics of State Taxation: Welcome to the Club? 2001 State Tax Notes 265, Jan. 22, 2001, (“I talked to several retailers in New York, who said they raised prices considerably knowing that people thought they were saving money by shopping tax-free.”).

[18]  See, e.g., Mary Worrell, Sales Tax Holiday A Bust For Some Retailers, Hampton Roads Business Journal, Aug. 13, 2007 (“Corprew said larger corporations and department stores have the luxury of big computer systems to calculate tax-free items, but for a small business like her clothing shops, she and her partner spend hours photocopying receipts and organizing sales information just to make sure everything is accurate and in order. ‘We have to split all the details and it’s a tremendous amount of work for us,’ Corprew said.”).

[19]  See Mississippi State Tax Commission, Official Guide for 2009 Sales Tax Holiday,

[20]  See Virginia Department of Taxation, Sales Tax Holiday for Clothing and School Supplies Guidelines and Rules, http://www.tax.virginia.gov/Documents/School%20Supplies%20and%20Clothing%20Sales%20Tax%20Holiday%20Guidelines.pdf.

[21]  See S.C. Code § 12-36-2120(57)(a)(vi).

[22]  See Texas Comptroller of Public Accounts, Energy Star Sales Tax Holiday,

[23]  Vermont Department of Taxes, Temporary Exemption for Computers August 7-9 and October 9-11, 2004,

[24]  72 Pa. Cons. Stat. § 7204(58) (repealed).

[25]  See Mark Robyn, Virginia’s Hurricane Sales Tax Holiday, Tax Foundation Tax Policy Blog, May 20, 2009,

[26]  See S.C. Code § 12-36-2120(57)(a)(vi).

[27]  See Kail Padgitt, VA Sales Tax Holiday, Tax Foundation Tax Policy Blog, Aug. 5, 2009,

[28] David Tuerck, Paul Bachman, & Frank Conte, The Effects of the Massachusetts Sales Tax Holiday on the State Economy, Beacon Hill Institute of Suffolk University, June 2015. https://retailersma.org/sites/default/files/BHISalesTaxHolidayReport2015.pdf.

[29]  See, e.g., Pat Hatfield, The Mystery Of Florida’s Vanishing Sales Tax Holiday, The Deland-Deltona Beacon, July 8, 2008.

[30]  See, e.g., D.C. Shoppers Fuming Over Canceled Holiday Tax Relief, WJLA News, July 20, 2009,

[31]  An exception would be where there is a negative externality, or societal cost, caused by consumers postponing their purchase. For instance, if an epidemic were raging and vaccines were available but too costly, immediately suspending governmental costs on vaccine purchases could encourage people to move up their vaccination, benefiting all society. In most such cases, however, other policy solutions such as subsidies or outright government provision would be more effective than a tax holiday.
Another example would be a desire to move the timing of consumer spending, such as with stimulus packages. Whether this would be effective economic policy can depend on one’s view about the effectiveness of stimulus packages, although sales tax holidays would likely be too small and too temporary for even a stimulative boost to aggregate demand. Similarly, stimulus proposals in 2009 for a federal payroll tax holiday were rejected in favor of direct government spending.

Legal Alert: Multistate Tax Commission Committees Discuss Apportionment Details and an Information-Sharing Program


Related Practices/Industries

July 29, 2015

Yesterday, the Multistate Tax Commission (MTC) held meetings of its Litigation, Uniformity, and Strategic Planning Steering Committees. The meetings were generally dominated by discussions of evolving apportionment issues, including litigation and significant edits to existing regulations. The Uniformity Committee also advanced its new model “engaged in business” statute.

Litigation Committee Updates

The Litigation Committee heard a presentation on and generally discussed the sourcing of digital goods. Initially focusing on sales tax sourcing, the Committee reviewed the current sourcing rules in both Streamlined Sales and Use Tax Agreement states and non-Streamlined states. The Committee also discussed sourcing rules under the proposed Digital Goods and Services Tax Fairness Act (S. 851). After discussing sales and use tax sourcing, the Committee turned to how to include digital goods in the sales factor. The MTC’s proposed Section 17 regulations are modeled on the Massachusetts sourcing rules and would impose a market sourcing regime. See our prior coverage for more information on the proposed Section 17 language.

The Litigation Committee also reviewed the extensive equitable apportionment litigation and predicted what the future might bring. The potential adoption of market-based sourcing in proposed Section 17 could mean an entirely new round of issues that could be ripe for equitable apportionment litigation under Section 18. Among those issues the Committee expects might be litigated under new sourcing regimes include issues related to defining the “market,” the possible distortion that single sales factor apportionment can create by excluding property and payroll factors from the apportionment formula, unanticipated sourcing issues, and situations where a taxpayer has “functional test” income but little or no “transactional test” income.

Uniformity Committee Updates

During the Uniformity Committee meeting, the Section 1 workgroup reported on its proposed edits to the existing MTC Uniform Division of Income for Tax Purposes Act (UDITPA) regulations. Section 1 of the Compact contains definitions and was amended last year to change the definition of business income. The draft regulation’s proposed changes added language to the definition of “apportionable income” to specify that it is all income apportionable under the United States Constitution, reorganized the structure of some definitions, and inserted new examples. The workgroup recommended conforming the regulations by universally using the terms “apportionable income,” “non-apportionable income,” and “receipts” for the terms “business income,” “nonbusiness income,” and “sales” throughout all of the UDITPA regulations (and not just those in the Section 1 regulations). Although no formal vote was taken, the Committee generally advised the workgroup to maintain a so-called five-year rule for determining when a business asset transitions to an investment asset. Under the current draft, property which has been withdrawn from use in the taxpayer’s trade or business for more than five years is presumed to be held for investment purposes. The Committee also advised the workgroup to keep in the definition of “receipts” a list of income that is presumed not to be “receipts.” Finally, the Committee requested that the workgroup give additional consideration to inserting new definitions. Potential new defined terms include “hedging,” “securities,” and “non-apportionable receipts.” The workgroup will reconvene to address the terms “gross receipts” and “trade or business.”

As expected, the Section 17 workgroup presented its model market-based sourcing regulations, which are largely based on Massachusetts regulations (830 CMR 63.38.1). The proposed language makes significant changes to the sourcing rules for receipts from sales of other than tangible personal property. The language specifies that income from marketing intangibles (for instance, trademarks) is only included in the denominator of the sales factor if the income is from a United States source (unless the licensor can demonstrate the extent to which the intangibles are used in foreign markets). The language also proposes a throw-out rule for income from marketing intangibles. Income from production intangibles (like copyrights, patents and trade secrets) is sourced to its place of actual use, if known, or if unknown, to the commercial domicile of the licensee. If a license also involves a digital good, then the sale will be sourced according to the rules for digital goods.

Sales of a contract right or government license are sourced to the state in which the right may be exercised. If an intangible does not fit within the listed sourcing rules, then it is excluded from both the numerator and the denominator of the receipts factor. The draft regulations separately address the sourcing of income from sales of digital goods. Sales of pre-written software delivered electronically and digital goods and services are sourced as if they were a service delivered electronically (that is, sourced to the place of use or delivery, depending on the identity of the customer).

The Section 17 workgroup asked the Uniformity Committee for guidance on several questions, including (1) whether examples should be included in the regulations, (2) whether “credit card processing services” should be included in the definition of professional services, (3) whether to include a de minimis rule for administrative and compliance receipts, (4) whether to address foreign tax haven jurisdictions in defining “subject to tax,” (5) how to handle the interaction of Section 17 and Section 18 (equitable apportionment), and (6) how to address related party transactions.

The Committee advised the workgroup to keep the existing examples in the regulations, reasoning that states are free to remove the examples if they wish. The Committee members agreed that “credit card processing services” should be included as a professional service. In the Committee’s opinion, this was not a change in policy, but rather a clarification that the “lending and credit card services” in the current definition of professional services include both extending credit to borrowers and processing credit card transactions. After discussing compliance benefits and the policy reasons for a de minimis rule for a small percentage of receipts, the Committee did not provide any instruction to the workgroup on this issue. Similarly, the Committee left the issues of defining “subject to tax,” the interaction between Section 17 and Section 18, and how to address related party transactions open for now.

The workgroup formed to address the Model Sales and Use Tax Nexus Statute referred its proposed language to the Uniformity Committee for consideration. The language includes a click-through nexus provision with a rebuttable presumption and a minimum threshold. This draft does not impose a collection duty on marketplace providers, but rather attributes nexus to a seller that uses a provider that engages in certain listed activities in the state. The Committee voted to move this item forward to the Executive Committee, which meets tomorrow, July 30.

Strategic Planning Steering Committee Updates

The Nexus Committee asked the Strategic Planning Steering Committee to charter a new project to investigate the creation of an information-sharing program among member states. The Steering Committee approved the development of a project description, which will be undertaken by members of the Nexus Committee. After the project description is completed, the Steering Committee will vote on whether to allow the project to move forward.

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed under ‘Related People/Contributors’ or the Sutherland attorney with whom you regularly work