A tax holiday temporarily suspends a type of sales tax, increasing consumer interest and possibly increasing revenue for small businesses, but there are drawbacks. Find out how a small business can take advantage of tax holidays.
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updated November 28, 2023 · 5min read
A tax holiday is a temporary removal of a tax imposed by the state or federal government on specific goods or products. Tax holidays have benefits and drawbacks that small business owners should understand.
Twenty states have had or will have tax holidays in 2022, and they cover a wide variety of products and situations:
Florida is the state with the most tax holidays—it has 10 types of tax holidays scheduled in 2022. Unique tax holidays offered in Florida include suspension of tax on tools, windows, and doors and a Freedom Week (around the Fourth of July) with no tax on entertainment such as movies, museums, and parks.
Tax holidays sound like they should provide significant savings for consumers and increase sales by small businesses. But a study by the Federal Reserve found that tax holidays don't necessarily increase consumer spending but rather just shift when people spend. This does not increase small business revenue.
Janelle Fritts, a policy analyst at the Tax Foundation in Washington, D.C., says that sales tax holidays hurt small businesses and "are political gimmicks that distract from real and lasting tax reform."
She explains that businesses may have to hire temporary employees or pay for overtime to handle the shifted sales, which reduces profits. She says that this year states are using tax holidays in response to inflation but that "if tax holidays did actually increase demand, they would be mildly inflationary and contribute to the problem."
Tax holidays also place accounting burdens on small businesses. Lucy Dadayan, a senior research associate at the Tax Policy Center in Washington, D.C., points out that online sellers must comply with tax holidays in all jurisdictions, creating accounting difficulties.
No matter the implications of tax holidays, if your state has one, you want to do everything you can to reap whatever benefits are possible.
"It is likely that many small businesses might not be able to afford the automated sales tax software and solutions," she says. "And those businesses that manage sales taxes manually will need to spend enormous amounts of time and work in figuring out all the details of the sales tax holidays and will need to map the inventory to tax codes created for a specific sales tax holiday." She said she believes tax holidays cost small businesses money and offer little or no return on investment.
No matter the implications of tax holidays, if your state has one, you want to do everything you can to reap whatever benefits are possible. Consider these tips to maximize your sales during tax holidays:
While tax holidays may bring you a temporary upturn in sales, there are some important tips for small business owners to keep in mind, suggests Jones.
Sales tax holidays can create added complications for small businesses, but with planning and attention to detail, you can get the most benefit possible.
by Brette Sember, J.D.
Brette Sember, J.D., practiced law in New York, including divorce, mediation, family law, adoption, probate and estat...
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