It’s sales tax holiday season! There’s a lot of debate on whether sales tax holidays are good tax policy. Critics say they’re merely a gimmick and states would be better off enacting laws that having lasting and beneficial impact on a state’s overall tax climate. Sales tax holidays also aren’t popular with State Departments of Revenue as they often result in a significant loss of sales tax revenue.
Whether to hold a sales tax holiday is a debate that occurs every year in Massachusetts – as the state is often one of the last to approve its holiday. You see unlike other states which have codified their sales tax holiday – meaning that the state has enacted legislation mandating that a sales tax holiday occur every year, usually on specified weekend – Massachusetts legislators must re-introduce sales tax holiday legislation every year. Whether Massachusetts will hold a sales tax holiday is decided on a year by year basis – it’s never guaranteed that Massachusetts will hold one. (Another Massachusetts sales tax fact.)
And often – as was the case again this year – sales tax holiday legislation was signed into law at the last minute, giving Massachusetts retailers little time to plan. For instance, the Massachusetts bill establishing a 2015 Sales Tax Holiday, H. 3659, was introduced on July 16th and signed into law by Governor Baker on August 6th. This means the bill moved through the entire legislative process within a few short weeks.
The very same day the Massachusetts Department of Revenue issued a Technical Information Release, TIR 15-7: The 2015 Massachusetts Sales Tax Weekend. This TIR is a “must read” for Massachusetts retailers – who are required by law participate.
I’ll explain more about the guidelines in TIR 15-7 in just a bit. But the TIR really got me to thinking about another aspect of sales tax holidays that is rarely touched on – the complexity they create for retailers. Oh yes, they’re a boon for consumers – which is why this time of year you’ll see article after article reporting on what consumers can purchase “tax-free”.
But for retailers – there’s a whole layer of complexity that complying with sales tax holidays will add. So let’s take a look at what Massachusetts retailers – and that includes out-of-state internet retailers registered as Massachusetts vendors – need to know.
Massachusetts Sales Tax Holiday Rules Present Complexity for Retailers
The Massachusetts Sales Tax Holiday will take place August 15th and August 16th. During the holiday, single items of tangible personal property with a sales price of up to $2,500 purchased for personal use are exempt from the 6.25% sales tax. The following items are specifically excluded from the holiday and remain subject to sales tax: all motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, and tobacco products.
While this seems pretty straight forward – and generous, since few states have as high of a threshold amount and many limit the types of items that can be purchased “tax-free” – the rules, as laid out in TIR 15-7, emphasize the complexity vendors must deal with. Here’s a quick look at a few of these rules.
In general, to be exempt from the sales tax during the Massachusetts sales tax holiday, the sales price of the item must be $2,500 or less and must be for personal, not business, use. If an item’s sales price is more than $2,500 then no portion of the sales price is exempt and the entire sales price is subject to sales tax. For instance, if a customer makes a purchase of a television with a sales price of $2,600 – the entire amount is subject to sales tax – not just the amount that exceeds the $2,500.
Here’s another piece of complexity. Under current law, Massachusetts exempts single articles of clothing with a sales price of up to $175. This means that at any time during the year, an article of clothing with a sales price of $175 or less is exempt from Massachusetts sales tax. (Another Massachusetts sales tax fact.) Now, let’s say that during the sales tax holiday, a bride-to-be purchases a wedding dress with sales price of $2,550. Under the sales tax holiday rules, the sales price of this item is greater than $2,500 therefore it does not qualify for the sales tax holiday exemption. The Massachusetts rules say that even if the first $175 of the sales price of the dress is normally not taxed (due to the clothing exemption), the $175 cannot be applied to determine whether the single item falls below the $2,500 threshold. However, in this particular example, although the sales price of the wedding dress ($2,550) excludes it from the holiday, the $175 does reduce the amount subject to the 6.25% sales tax. Thus, tax would be due on $2,375 of the wedding gown price ($2,550 less the $175 clothing exemption).
What about bundled transactions? If a package of related items is normally offered for sale at a single price, then the sales price of the “bundled package” must not exceed $2,500 to qualify for the sales tax holiday. For instance, if a computer package which includes a CPU, keyboard, monitor and mouse is sold as a bundled package for $3,000, none of the purchase would qualify for the sales tax holiday. However, if these same items were normally sold individually and the CPU’s sales price is $2,600 but all of the other items each sell for less than $2,500, then the CPU would be taxable but the other items would be exempt.
Here’s another typical situation you might see during the sales tax holiday – the use of retailer or manufacturer coupons and discounts. Here the TIR says that coupons and discounts can be used to reduce the sales price to determine whether the item’s price is $2,500 or less. What if a discount or coupon applies towards a customer’s total purchase? Here the TIR says the discount or coupon is allocated pro-rata to each article sold based on the item’s sales price. So let’s say a furniture store offers a 20% discount off a customer’s total purchase. The customer purchases a dining room table for $2,900, and a sofa for $3,500 which together cost $6,400. Without the 20% discount, neither item qualifies for the sales tax holiday. The TIR instructs that the 20% discount, which in this situation is $1,280 ($6,400 times 20%) is prorated to each item. Here is how it would work: 45% ($2,900 table cost/$6,400 total cost) of the discount would reduce the sales price of the table. Thus, 45% of the total discount – $1,280 times 45%, or $576 – would reduce the price of the table to $2,324 ($2,900 less the prorated discount of $576), making the table sales tax exempt. The other 55% ($3,500 sofa cost/$6,400 total cost) of the discount would reduce the sales price of the sofa. Thus, 55% of the total discount – $1,280 times 55%, or $704 – would reduce the price of the sofa to $2,796 ($3,500 less the prorated discount of $704). Since the discounted sofa price still exceeds $2,500, sales tax would be due on the entire $2,796 discounted sofa price.
If the above aren’t enough to emphasize the complexity that Massachusetts retailers must deal with, TIR 15-7 also addresses how transactions such as exchanges, layaway sales, special orders, transfers occurring after the holiday, rain checks, rentals, rebates, and returns are impacted by the sales tax holiday. Again, complex! Which is why I said earlier, the TIR is a must read for any Massachusetts retailer participating in the holiday.
Sales tax holidays! Applauded by consumers, criticized by tax policy experts, and disliked by the retailers who must apply complex sales tax rules or risk being non-complaint. If you’ll be shopping in Massachusetts this coming weekend, you might want to bring along a copy of TIR 15-7 (and perhaps this blog post too Your Massachusetts retailer just might thank you for the extra guidance.
Other recent “Massachusetts (MA)” posts by Sylvia F. Dion, CPA:
- Massachusetts' Economic Nexus Reg to be Enforced Retroactively
- Amazon Exposes FBA Sellers in Massachusetts: 5 Key Considerations
- Massachusetts Expands Sales Tax Nexus Policy for Internet Vendors
- The Massachusetts DOR Website - A Great (Sales) Tax Resource
- MassTaxConnect - 5 Things Massachusetts Sales Tax Filers Should Know