Sales Tax Holidays and Tax Free Weekends, Explained

In brief:

• Sales tax holidays, sometimes called “tax free weekends” are short periods of time when shoppers can go to stores and buy certain items tax free. 
• They are often held in autumn at “back to school” time or in the spring for severe weather season disaster preparedness. 
• Sales tax holidays can present an administrative headache to e-commerce retailers because they are often mandatory and the seller needs to determine how to prevent sales tax collection on certain items, in certain states, over certain time periods. 

Sales tax holidays (AKA tax free weekends) can be a boon for consumers, who essentially see them as 4-7% discounts on products like back to school supplies or emergency preparedness items. 

For retailers, though, these short tax-free periods can be a confusing disruption. This is especially true for e-commerce sellers who have sales tax nexus in multiple states and find themselves having to deal with sales tax holidays state by state.

What are sales tax holidays and why do we have them?

Sales tax holidays, sometimes called “tax free weekends” are short periods of time when shoppers can go to stores and buy certain items tax free. 

In some states, items are only free from state tax and shoppers will still have to pay the local sales tax rate. (Read more about how sales tax rates work here.)

In the US, states set their own sales tax rules and laws. Many states use tax free weekends as an incentive to get shoppers shopping, often for necessities. 

For example, many states have annual back to school sales tax holidays in the fall. These give parents a break on school clothes and supplies. States that suffer hurricanes and other severe weather often hold emergency preparedness holidays on items like generators and emergency kits. 

Other states use sales tax holidays to incentivize shoppers to stay in-state (or even to lure shoppers from other states.) For example, Massachusetts often offers tax free weekends at key times to keep shoppers in-state rather than crossing the border into New Hampshire, a state with no sales tax year-round.

Politicians often see short breaks from paying sales tax as politically expedient, popular and a way to stimulate the economy. 

But for retailers, especially e-commerce sellers, sales tax holidays can be difficult, unpopular and a surefire way to develop a headache. 

What e-commerce sellers need to know about sales tax holidays

The trouble with sales tax holidays for e-commerce sales is that you need to be able to turn off sales tax collection on certain items, when shipping to individual states, over a limited time period. 

If you don’t manage to turn off sales tax collection on items that are subject to the holiday, your customers may complain, or worse, turn to a competitor who does support the sales tax holiday. 

But actually supporting the sales tax holiday is difficult for e-commerce sellers, too. 

You’re required to know each state’s special sales tax rules. 

• Does a state even have a sales tax holiday? Generally around 20 states have at least one sales tax holiday each year. Some states have the same holiday(s) every year, while other states are required to approve a new tax free holiday each year, and sometimes do not hold one. Some states also approve sales tax holidays at the last minute.
• Is a sales tax holiday only on state sales tax? If the holiday only excludes state tax, this means you’re still required to collect local sales tax (city, county, etc.) from your buyer. Worse, some states allow local areas to opt in or out of a sales tax holiday. This might mean you need to collect one county’s sales tax but not the county sales tax rate in the county just next door.
• What dates do the sales tax holidays cover? Each state’s schedule is different. Even “back to school” sales tax holidays, though they happen in the fall, can vary by date and length. 
• What specific items do the sales tax holiday include? One state might include computers in a “Back to School” sales tax holiday while other states only include clothing and footwear. And many states are vague about which specific items count as “school supplies.” 
• Are you required to honor the holiday? Some states require retailers, even out-of-state e-commerce retailers, to honor the sales tax holiday while others allow you to opt out. This decision is up to you. Honoring the holiday might lead to more sales, but opting out would be much easier administratively.

How to handle sales tax holidays as an e-commerce seller

Turn off sales tax collection item-by-item

If your sales tax engine allows it, you can go in manually and turn off sales tax collection on each item that is subject to the sales tax holiday.

The downsides here are that this is a tedious manual process, especially if your store sells a large catalog of items. You also need to remember to turn sales tax collection back on after the holiday is over. This may also mean you need to take care of edge cases, such as sales you made overnight after the sales tax holiday officially ended. 

Unfortunately, most sales tax collection engines do not allow for this level of granularity, so this simply isn’t an option.

Turn off all state sales tax collection over the holiday and pay sales tax out of pocket

You can also just turn off sales tax collection completely for a state over the holiday weekend and then pay any uncollected sales tax out of pocket. 

This is an option if you wish to honor the tax free weekend but have no way to turn off sales tax collection for individual items. However, this will mean you’ll need to determine how much sales tax you should have collected on items you sold that were not subject to the sales tax holiday. 

Again, this is a tedious manual process. And if you get this wrong, you can be subject to interest and penalties from the state.

Do not participate in the sales tax holiday

Sales tax holidays are mandatory in some states (such as South Carolina), but other states allow retailers to opt-in or out. The good news is that most state’s taxing authorities are generally not going to penalize you for literally collecting sales tax. (After all, they want tax money to pay for budget items like schools and hospitals!) 

The worst case scenario here if you are allowed to opt out of the sales tax holiday is that you lose sales over the holiday because customers choose to shop with competitors who are honoring the sales tax holiday. However, in a slim-margin business like e-commerce, losing a weekend’s sales to competitors can be a heavy blow to the bottomline, so that business decision is up to you.

State Sales Tax Holidays and Tax Free Weekends by Year

See here for the list of 2023 tax free weekends and sales tax holidays by state.