Tax bargains available for some back-to-school shoppers
By Kay Bell • Bankrate.com

Get ready shoppers. Along with new shoes and the kids' school notebooks, bargain hunters in some parts of the United States soon will be able to pick up a few tax breaks.

This year, 12 states and the District of Columbia have decided to take a brief break from collecting sales tax on items ranging from clothing to school supplies to personal computers. These so-called tax-free holidays last anywhere from one day to more than a week and, in many cases, local jurisdictions also forgo collection of their additional sales-tax assessments.

Can these holidays save consumers some money? Yes, but they also could cost shoppers if they spend more than they normally would just to save a few tax dollars.

Will businesses rake in extra dough? Many will, but they also will have to deal with complicated tax changes for a few items over a limited time.

Are tax holidays likely to disappear? Probably not entirely, but expect state lawmakers to look long and hard at them during tough economic times.

The birth of a tax-break trend
New York initiated sales-tax-free shopping days in 1997 and a tax movement was born. Since then, several states have followed the Empire State's lead. Participation depends largely on budgetary constraints, so the number of holidays varies from year to year as some states drop out and others join based on their treasuries' bottom lines.

Florida, for example, rejoins the no-sales-tax celebration after skipping its holiday the last couple of years; Washington, D.C., is back, too, after a one-year break. Massachusetts and Missouri are 2004 newcomers.

While a dozen states are currently participating, the number of sales-tax holiday states over the past few years has hovered around 10. The events generally are scheduled for late summer to tie in to traditional back-to-school shopping. Not only is the timing a good fit for retailers, it's a perfect peg for politicians. Lawmakers argue that any lost tax revenue is worth helping parents get their youngsters ready for class.

Florida kicked off the 2004 no-sales-tax holiday season on July 24 with its week-long event. Eleven other states follow, temporarily halting tax collections on specified products, primarily in August. New York's holiday slips into September and Vermont has two long weekend tax breaks (for personal computer purchases only) in August and October.

"It is advertised as being for the consumer, and certainly if you make purchases during that time you won't pay sales tax," says Risa Williams, editor in chief of state tax products for the Arlington, Va., publishing company Tax Analysts.

"But it's much more of a political move," says Williams, who also teaches state and local tax issues at George Mason Law School. "As a politician, when you can look like you're giving a break to your constituents, that's always good."

Cate Williams (no relation to Risa Williams) points out that the tax holidays also are good for businesses.

"From a merchant standpoint, this is some of the best free advertising they could get," says Williams, vice president of financial literacy for Money Management International, a nonprofit credit and debt counseling firm. "It's pretty creative advertising when you can get the press to really pick up and say 'go to your local department store.' Sears can't buy that kind of advertising."

Plus, she says, the sales tend to be centered around an event like "back to school," a time when "summer sales are pretty well exhausted."

Don't waste the tax savings
Both women agree that any tax savings can be easily negated.

Sure, shoppers can certainly save some dollars during a tax holiday, as long as they watch what they buy. States are specific about what is, and what isn't, exempt from tax, so someone who goes a bit crazy at the mall could end up spending more than intended and paying taxes, too.

"If consumers buy more than they normally would have, the tax holiday doesn't do them any good," says the Tax Analysts' Risa Williams. "It's up to consumers to make this valuable, to get the most impact. They need to be mindful, pay attention to the prices and pay attention to their spending so that they don't spend more than they would have at another time."

MMI's Cate Williams agrees: "Shopping has become a recreation rather than a chore, so there's a real possibility that consumers coming in for some savings get caught up and buy other items that aren't tax-free."

That's why the credit counselor suggests you have a shopping plan before heading to the mall during a tax holiday.

Establish a sales-tax savings plan
First, says Williams, find out if what you need falls under the tax holiday program. Most states have published detailed lists of products that are sales-tax-free, so check beforehand. "If you're planning on purchasing the items anyway," she says, "then it's a great day to shop."

She also recommends that shoppers set a spending limit and be realistic about what they'll find in the stores. "Shoppers probably won't see any really deep discounted, 'take an additional 30 percent off' items during these events," she says.

In fact, she says, "Who's to say that retailers aren't bumping up the prices because they have to cover the cost of administering the tax holiday?"

Next, decide what you're going to do with any sales tax you don't pay.

"It's not a savings until you do something with it," says Cate Williams. "Take a mom with a couple of kids who's buying $600 worth of backpacks, school clothes and such. That's a $39 saving at a 6.5 percent sales tax. It's easy to spend that on lunch for the kids."

Instead, Williams suggests that tax-holiday shoppers put the savings to another use. "Show me the real savings," she says. "If it's enough that you can buy one more pair of shoes or a better quality pair of shoes, that's great. But don't waste the savings."

Finally, don't hand over your sales tax savings to your credit card company by carrying an account balance that accrues interest charges.

"Don't you dare pay one percent of interest on this purchase," says Cate Williams. "The minute you do, any real or perceived savings is gone out the door."

To help shoppers find out if their states offer a sales-tax holiday, Bankrate has created a table showing participating states, dates, untaxed items and links to official information about the holiday.

-- Updated: Aug. 6, 2004