The Impact of Back-to-School Sales Tax Day

Tax Planning

The end of summer is upon us, and for the nation’s parents, that means one thing: back-to-school time. As in years past, stores are heavily promoting pens, notebooks, clothing, and other items families are sure to stock up on over the coming weeks. But what many parents may not be aware of are the sales tax holidays many states offer to make back-to-school shopping more affordable.

Today, we explore the sales tax breaks different states offer to parents, and how those breaks impact the economy.

Back to school
Back to school

Which Purchases Are Tax-Exempt?

In recognition of back-to-school time, several states suspend their sales taxes on commonly purchased supplies. As TaxAdmin.org shows, these supplies most typically include:

  • Clothing
  • Footwear
  • Computers
  • Notebooks
  • Pencils/Pens
  • Staplers
  • Markers
  • Binders
  • Sports equipment
  • Backpacks

Each state exempts a different amount of each purchase. For instance, Alabama enables shoppers to shield $100 worth of clothing, $750 worth of computer equipment, $50 of school supplies, and $30 of books from sales tax. In practical terms, this purchase would equate to a sales tax savings of $37.20 (based on Alabama’s 4% tax rate.) TaxAdmin.org’s chart lists the specific exemptions for each participating state: Alabama, Arkansas, Connecticut, Florida, Georgia, Iowa, Louisiana, Maryland, Massachusetts, Mississippi, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

Do Consumers Save as Much as They Think?

In an August article on potential downsides to sales tax holidays, TimeMagazine argues that consumers may not be saving as much as they think. For one thing, in a retail environment, it’s common to see 20%-30% off sales periodically throughout the year, irrespective of whether it’s back to school time or not. In light of this, taking 4% or 8% off is rarely a compelling reason to visit the store (unless, of course, a sale is currently in effect too.)

Instead, Time cautions shoppers not to get caught up in sales tax exemptions to the point of ignoring the big picture. If you were not already planning to buy school supplies or a new computer, do not let the absence of a sales tax change your buying priorities, as it may not be worth it financially. Additionally, the best promotions that coincide with sales tax holidays are on clothing. If your child objectively needs a new wardrobe, now can be an excellent time to purchase it.

Unplanned & Fully Taxed Purchases During Sales Tax Holidays

According to South Carolina’s Cheraw Chronicle, many states actually increase their overall sales tax revenues during the back-to-school tax holidays. How can this be? Simple. While shoppers are stocking up on tax exempt items like clothing and backpacks, they tend to make taxable purchases that more than make up for the sales tax they are saving: for instance, trips to mall food courts, or unplanned “impulse buys” of items not covered by the exemptions.

Additionally, increased jobs and payroll taxes (resulting from the needs for higher staffing during the tax holiday) tend to increase the state’s take, too. Thus, on net, most states end up better off than they were before the back-to-school exemptions.

Stimulus, or Shifted Timing?

Finally, there is some question about whether back-to-school sales tax holidays actually increase sales for retailers. On the surface, the question seems silly to ask. But in a Tax Foundation study referenced by Time, a fascinating conclusion emerges. Sales tax holidays, rather than driving new and higher sales volumes, simply cause consumers to shift the timing of purchases they were already going to make. Rather than buying earlier in the summer (or later in the fall), shoppers just wait for the sales tax holiday and make all their back-to-school purchases within that window.

In spite of this, retailers are said to love the tax holidays because they amount to “free advertising for what is effectively a paltry 4 to 7 percent sale.” Nevertheless, the Tax Foundation says the holiday is a gimmick, and a “poor tax policy”, stating that if lawmakers truly wanted to save us money, they would cut sales tax rates all year.

The Takeaway

Taking everything into account, shoppers are advised to utilize sales tax holidays only when they coincide with larger sales, and/or if they were already going to buy the exempt items in question. Buying simply because of the tax holiday, and in spite of a pre-existing need, could be a waste of money.

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