If you’re selling in any of the 18 states that have sales tax exemptions in 2021 (plus Puerto Rico), you need to understand how those temporary tax-free periods can affect sales tax compliance. Once a primary concern of state businesses, VAT exemptions can now affect online sellers with no physical presence in the state – and they can mess up VAT compliance if not handled properly.
There are numerous pitfalls to watch out for when selling in a sales tax vacation state, including, but not limited to:
- Start and end times.
- Opportunities to participate.
- Qualifying Products.
- Price restrictions.
- Returns and exchanges.
Start and end times
Together, 18 states and Puerto Rico will offer at least 31 sales tax exemptions in 2021. Other states may choose to do the same, although that looks increasingly unlikely.
The high point of the sales tax-free holiday season is summer, but they can run at any time of the year: The first two tax-free periods in 2021 took place in February; the last is after Thanksgiving in New Mexico.
Every sales tax vacation begins and ends at a specific time on a specific date. For example, in Florida, back-to-school sales tax vacation starts on Saturday, July 31st and ends on Monday, August 9th Florida Department of the Treasury Instructions won’t be more specific, however Virginia tax bill does: The sales tax leave begins on August 6th at 12:01 pm and ends on August 8th at 11:59 pm
Yes, it may be necessary to calibrate your POS systems down to the minute to ensure they don’t mistakenly apply VAT to qualified transactions or extend the exemptions to purchases made after the vacation ends. And once you’ve determined the time and place of a sales tax vacation, the scope needs to be further refined.
You need to determine if you need to qualify for a state sales tax exemption, if you need to collect or exempt applicable local taxes, and if you can pay tax on non-qualifying items – if you so choose.
Most states require sales tax exemptions for local jurisdictions, but a few allow local tax jurisdictions (i.e., cities and counties) to opt out. That is the case in Alabama and Missouri. Each year, the Alabama Department of the Treasury and the Missouri Department of Treasury publish lists of participating and non-participating jurisdictions. Unfortunately, these lists sometimes change at the last minute, which can mess you up.
Many states also require all businesses to attend sales tax breaks. However, some states offer a choice. As a result, retailers are required to attend the Massachusetts tax-free season, but not the New Mexico back-to-school sales tax break.
All companies that are open during the annual Iowa sales tax vacation must attend and cannot pay sales tax on unqualified items. In contrast, Texas allows retailers to pay sales tax themselves instead of giving it to customers.
Now that you have determined these factors, you need to set up point of sale systems to exempt qualifying products.
During the Massachusetts sales tax exemption, most individual items of tangible personal property are eligible for temporary exemption. Most states aren’t nearly as generous.
Sales tax holidays tend to focus on a topic like back to school or emergency preparedness. Clothing and school supplies are excluded during an event at the start of school, while batteries, generators and tarpaulins are excluded during tax-free times for emergency preparation.
However, the exception may not apply to all products falling under the covered category. For example, raincoats qualify for the Mississippi sales tax exemption, but rollerblades do not. A fishing vest would qualify unless it helps you swim and you will have to tax any products that are not on the all-inclusive list of eligible school supplies.
Even qualified items may need to be taxed if they exceed the price limit.
Most sales tax holidays include price caps. In many states temporarily exempting clothing, a $ 50 dress would qualify for an exception while a $ 250 dress would not.
There are some exceptions to the price cap rule. Maryland’s tax-free period for energy-efficient appliances is not subject to price restrictions; Neither does the South Carolina sales tax exemption for August or the Mississippi sales tax exemption for ammunition, firearms, and certain hunting items.
Massachusetts has an admirably simple threshold: $ 2,500 for every single tangible personal property. It’s in stark contrast to Florida, where this year’s Recreational needs and admissions for sales tax leave exempts the first $ 50 of retail price from safety flares, first $ 75 of retail price from paddles, and so on.
It’s a lot to manage, but with knowledge (and Sales tax automation) you can successfully exempt the taxable sales and tax the taxable ones. Including stopovers.
Storage policies also vary from state to state and often depend on the terms of sale. For example, consumers can purchase qualified items tax-free in Texas if the item is put in stock or the final payment is made during the tax-free period.
There is no tax on installment payments if a customer puts a product in stock during the time Connecticuts tax free week. However, you will need to charge Connecticut sales tax if the final payment is made during the vacation for a product that was layaway prior to the vacation.
It’s easier in Mississippi: Put-away sales of eligible items do not qualify for the temporary exemption. Could this be a repentance for going for years Massachusetts gave retailers just a few days to prepare for its sales tax vacation?
Tax policies related to shipping and handling fees are another issue. In Mississippi, shipping and handling charges are not included in the retail price and therefore do not affect the price caps. However, these fees must be included in the sales price in Florida in order for them to affect the eligibility of a transaction. Actually, Florida requires retailers to split shipping and handling fees for each item in a shipment, “to determine if an item is VAT exempt during the holiday”.
Sales tax holidays can add to your Nexus footprint
You may think that there is no need to worry about sales tax in states where you are not registered to collect and pay sales tax. Think again Tax-free periods can increase your sales tax obligations by expanding your Nexus footprint.
Nexus is a link that enables a state to impose a tax collection obligation on a company. The physical presence in a state always creates a connection. Today, a nexus can also be created through sales activities in one state (economic nexus) alone, such as $ 100,000 in taxable retail sales or 200 separate taxable retail transactions in the current or previous calendar year.
States allow an exemption for companies selling below their economic nexus threshold. Unfortunately, the thresholds vary from state to state. So you won’t connect to California until you (and your affiliates) have totaled $ 500,000 in total tangible personal property sales in the previous or current calendar year, but you must register in Arkansas after your 200th transaction. this federal guide to economic cohesion laws provides state-specific threshold details.
The economic context needs to be taken into account as sales often perk up during the VAT holidays and an increase in sales can cause a retailer to directly cross a threshold in the economic context. If this happens to you, you may need to register with the state and start collecting sales tax on the next transaction.
To learn more about this year’s sales tax break, read Sales tax holidays 2021. If you want to learn how automating VAT collection and transfer can improve compliance, read here avalara.com.