Sales Tax Holiday Under Fire

4:36 PM, Jul 31, 2013   |    comments
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Columbia, SC (By Mary Orndorff Troyan, Gannett Washington Bureau)

South Carolina shoppers will save about $3 million this weekend when the state suspends its 6 percent sales tax on school-related items and other products such as adult diapers, corset laces and tuxedos.

The annual sales tax holiday begins at 12:01 a.m. Friday and ends at midnight Sunday. The South Carolina Department of Revenue advertises the event as both consumer- and business-friendly because it provides a financial boost for families and a competitive edge for South Carolina stores.

"This is one of the top weekends for retailers, right up there with Black Friday," said Lindsey Kueffner, executive director of the South Carolina Retail Association. "This is a big deal."

But it may be a dying trend. This year, 17 states offer sales tax holidays. That's down from 19 three years ago, the highest number since New York started its holiday in 1997. This will be North Carolina's last such holiday, and South Carolina lawmakers last year considered ending them, too.

Tax policy organizations are increasingly challenging the holidays as short-sighted publicity stunts that do little to help lower-income families and keep governments from making tax changes that are more fair in the long run.

"Sales tax holidays are poorly targeted and too temporary to meaningfully change the regressive nature of a state's tax system," concluded the Institute on Taxation and Economic Policy in a report last week.

The Tax Foundation also released a report last week that said sales tax holidays "neither promote economic growth nor increase purchases."

"They create complexities for all involved, while inserting the political process into consumer decisions," that report said.

Among the criticisms:

- Wealthier people can afford to lump all their purchases into one weekend, unlike those living paycheck to paycheck.
- Consumers don't necessarily buy more back-to-school items, they just change when they buy them, so tax holidays don't improve overall sales.
- Unscrupulous retailers raise their prices during tax holidays.
- Tax revenue lost because of tax holidays force governments to cut spending or raise more money elsewhere.

- States manipulate the market by picking winners and losers in deciding which items are exempt from sales tax and which aren't.

South Carolina's sales tax holiday is particularly unusual. It's the only state that applies its tax holiday to all items in the three categories - clothing, school supplies and computers - without regard to their cost.

North Carolina's tax holiday, in contrast, applies only to clothing and school supplies that cost $100 or less, and to computers that cost no more than $3,500, according to the Tax Foundation study.

But in South Carolina, a family buying $5 packages of pencils gets the same 6 percent price break as the woman buying a $10,000 wedding gown.

"Yeah, I don't know what that has to do with going back to school," said South Carolina Rep. Tommy Stringer, R-Greenville. "It is unusual."

Stringer last year advocated a broader tax reform proposal that would have ended a slew of sales tax exemptions and eliminated the sales tax holidays, in exchange for lowering the sales tax rate, year-round, on everything. It never became law - each exemption had a lobby that fought to preserve it - but Stringer said Wednesday he may try again.

Consumers mistakenly view sales tax holidays as a deal, he said. "It's popular, but it's misunderstood," Stringer said. "It's a gift horse, so people don't want to look too close."

The estimate that South Carolina shoppers will save $3 million over the tax-free weekend was based on research on retailers that sell school supplies, said Samantha Cheek, a spokeswoman for the state's Department of Revenue. "The holiday generates a lot of buzz this time of year as it tends to be on the minds of consumers and retailers," Cheek said.

The law that created the tax holiday doesn't allow cities or counties to opt out, meaning local sales taxes also are put on hiatus.

Cheek said the Department of Revenue receives very few complaints that retailers aren't following the rules of the holiday, and the agency has never had to revoke the operating license of a business for not complying.

Retailers say they are accustomed to the administrative changes they have to make to collect sales taxes on some items but not others during the holiday weekend. And they say the holiday generates ancillary spending by consumers that isn't tax-exempt but boosts business. "They'll buy a computer and then the accessories and software, they'll fill up on gas, go to the mail food court, or make a weekend of it and maybe get a hotel near a mall," Kueffner said. "And those expenditures would be taxable."

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