Back-to-School Tax Holidays: Good for Consumers, More Work for Retailers

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While tax holidays, such as back-to-school breaks, appear to offer retailers an opportunity for additional sales, such benefits can only be realized if that retailer is equipped to handle the operational hassles of sales tax compliance.

While it is clear in the news lately that multinationals are facing significant difficulties in managing cross-border taxes, it’s easy to overlook just how complicated taxes can be just within the United States—or even in a single state. For 17 states and Puerto Rico, July marked the beginning of back-to-school tax holidays, with the majority of tax breaks happening this week. Offering consumers relief during the second biggest shopping time of the year, last year families with children in grades K-12 spent nearly $690 on school-related items. But these consumer tax breaks can be an operational nightmare for the retailers chartered with collecting sales tax on behalf of government.

Keep in mind that retailers already have to comply with a plethora of tax changes—whether in the form of new tax laws such as the proposed Marketplace Fairness Act, or the hundreds of annual sales tax changes typical in a given year.

A company managing indirect tax in-house spends significant resources for each sales and use tax change, whether the tax law is permanent or for a select period of time. Not only do they have to know the intricacies of the change, but they also have to input that data into their operational systems to ensure every transaction is in compliance.

Calculation and determination is not a simple undertaking—adding temporary changes for back-to-school tax holidays only adds to an already cumbersome process. For example, in the United States, the average mid-sized business with presence in all 50 states needs to:

• Research 13,000+ taxing authorities for rates and rules and keep updated every month.

• Determine taxable status and rates across 13,000+ tax authorities every time a new product or service is introduced.

• Update systems with an average of 1,000 tax rate changes each year, most of them with little advance notice. An onerous month includes 400-500 rate changes.

• File around 5,400 returns and process 5,400 checks to taxing authorities every year; or 450 returns and 450 checks each month; or on average prepare 15 returns a day and process 15 checks a day. Unfortunately, the process can’t be spread out over the month and happens in three required payment periods each month.

So while tax holidays, such as back-to-school breaks, appear to offer retailers an opportunity for additional sales, such benefits can only be realized if that retailer is equipped to handle the operational hassles of sales tax compliance. The most effective way to manage the many sales tax changes they face, including temporary tax breaks, is with automation tax technology. Manual compliance is simply not an option in today’s technology-driven and dynamic world.

States differ greatly on the variety of items that are exempt and the threshold amount. For example, some states exempt all tangible personal property, others in hurricane areas exempt related supplies, and others clothing, footwear, school supplies and computers.

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Carla Yrjanson

Carla Yrjanson is the Vice President of Tax Research & Content for Indirect Tax within Thomson Reuters. She leads the Tax Research & Content Team which is responsible for delivering Sales/Use...

J. Harold McClure

Dr. James Harold McClure, senior manager of transfer pricing at Thomson Reuters, has over 18 years of transfer pricing and valuation experience and has authored a number of papers on the subject....
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