Back-to-School Tax Holidays are Not Our Friends

Back-to-school season is approaching, and with it comes the return of sales tax holidays in many states. These temporary exemptions on school supplies, clothing and other essentials are meant to offer families a bit of financial relief. While the idea may sound appealing; the reality is more complicated.

“Sales tax holidays create administrative difficulties for state and local governments and for retailers who must collect the tax,” according to an article from the Institute on Taxation and Economic Policy (ITEP). “…Further complexity can arise in states with local sales taxes when some localities opt not to participate in the holiday and consumers unexpectedly end up paying local sales taxes on their purchases.”

I’ve written on this topic in the past, noting that sales tax holidays like the 2023 relief package Florida enacted  -- which included multiple holidays covering back-to-school, disaster prep, recreation, and skilled worker tools – are difficult to track and manage. It can be hard to distinguish between temporary holidays and permanent exemptions while delivering questionable payoffs. Plus, sales tax holidays rarely stimulate major purchasing increases over the long term while distracting state legislators and other tax policymakers from addressing more systemic indirect tax challenges – like the shrinking tax base.

The ITEP article makes a similar argument with two notable wrinkles. First, ITEP estimates that sales tax holidays cost states and localities a total of more than $1.3 billion annually in lost revenue in 2024. This shortfall caused governments to either cut spending or raise other tax rates to compensate. Second, the temporary nature of sales tax holidays creates substantial operational complexity for the duration of these temporary exemptions.

For indirect tax teams managing these challenges, relying on an external tax engine that automatically updates tax rates and rules can help reduce compliance burden. However, even with automation, tax teams must actively schedule and monitor these updates to ensure accuracy during temporary exemption periods. That scheduling is crucial to perform (ad update as needed) given the degree to which accurate and timely tax and transactional data are needed to sustain compliance during back-to-school season

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