Tax Holidays Still Worth Celebrating

Rest easy, back-to-school shoppers.

Even as states scramble to get their budgets in order, many still plan to offer summer sales-tax holidays. All 15 states that held summer tax holidays in 2008 will suspend their sales taxes for at least a day this year.

In fact, several states have expanded their holidays. West Virginia doubled the price threshold for its fall holiday on Energy Star products to $5,000, and New Mexico expanded its August coverage on computers and computer accessories to per-item maximums of $1,000 and $500, respectively. (Last year, New Mexico waived the tax only on a single purchase of a computer and accessories worth up to $1,000.) Mississippi will offer a tax holiday for the first time on July 31 and Aug. 1, when the state waives its 7% tax on clothing and footwear worth $100 or less.

Washington, D.C., is the exception. The capital repealed its 2009 summer holiday (a tradition since 2004), which would have waived the 5.75% tax on clothing, footwear and school supplies worth $100 or less. The district cited budgetary concerns and a projected loss of $640,000 in tax revenue over the week-long holiday.

Participating states are betting the sales-tax holidays will generate an economic boost powerful enough to offset the loss in tax revenue, says Richard Ebeling, an economics professor at Northwood University in Midland, Mich. “In the long run, this acts to stabilize the local business economy,” he says. Troubled retailers draw in foot traffic and sales, and consumers catch a break on necessary school supplies. Some states may even see some tax revenue, if the break encourages consumers to add a few items to their shopping lists not covered by the holiday.

For consumers, a sales-tax holiday offers added incentive to hit the mall, but be on the alert for the fine print. Here's how to take advantage of your state's holiday:

Some towns and counties will waive more than the state portion of the sales tax during the holiday, but others will continue to tax items at their standard rate. “You might still have a local sales tax in effect,” says Carol Kokinis-Graves, a senior analyst with the tax advisory firm CCH. Alabama’s Jefferson County -- which includes Birmingham – plans to continue collecting its 2% sales tax; the projected $200,000 in tax revenue taken in during the August holiday could save seven county jobs, the county said in a statement. Check with your state tax commission to see what your area is doing before you decide which local mall to hit.

Many states get very specific about their tax-free items, so read up on what's included in the holiday before you hit the mall. For example, Iowa excludes athletic apparel in its definition of clothing and footwear, and North Carolina includes footwear insoles, aprons and disposable diapers.

Many retailers are likely to offer discounts to push prices on qualifying items below state thresholds, says J. Craig Shearman, a spokesman for the National Retail Federation, an industry group. But not every price reduction entitles you to tax-free shopping. Some states, including Mississippi, don’t count manufacturers coupons or rebates when assessing an item’s value.

Web purchases are covered, as long as the retailer processes the order within the holiday time period.

Mark your calendar with these dates for a sales tax holiday near you: