Why SMB Retailers Are Losing Money on US Sales Tax Holidays
By the end of 2024, over 30 sales tax holidays took place across 20 states, offering shoppers temporary tax breaks on items such as school supplies, clothing and appliances. These events are designed to drive consumer spending and boost retailers’ bottom lines, but for many small and medium-sized businesses (SMBs), they're more of a burden than a benefit.
In fact, a recent survey revealed that nearly 60 percent of SMB retailers either break even or lose money during sales tax holidays, despite an uptick in sales. While 32 percent of respondents acknowledged reporting a profit, an equal percentage described the experience as a "logistical nightmare."
The main culprit? Last-minute changes and inconsistencies across state regulations, which leave SMBs scrambling to comply.
The Complexities SMB Retailers Face
State sales tax holidays are supposed to benefit all retailers, but in reality they tend to cater to larger, more established businesses that have the staff and resources to comply. SMB retailers are often left to figure out the intricacies of compliance on their own, with little to no targeted support from state governments.
So, just how complex are sales tax holidays? The answer: very, very complex.
For starters, there is no federal playbook for sales tax holidays. This means that states each have their own rules — different dates, categories of exempt items, and price caps. SMB retailers, especially those selling online to multiple states, must navigate this patchwork of regulations, and understanding and applying the varying rules can be overwhelming.
Product categorization adds another layer of difficulty. Retailers must correctly classify eligible products for tax exemptions, which can be tricky when items fall into ambiguous categories. For example, the same product may be taxed differently depending on the state due to slight differences in description or intended use. Even more complicated are special promotions and bundled products. If part of a bundle is exempt and part is not, retailers need sophisticated point-of-sale and tax compliance software to manage the taxability properly.
The complexities don’t stop there. Sales tax compliance during these holidays requires careful tracking and reporting. Retailers that fail to account correctly for tax-exempt sales may face fines or audits, a risk particularly burdensome for SMBs that lack the tax expertise and resources available to larger corporations.
To tackle all of this additional complexity, SMBs often are forced to hire additional staff to manage the surge in demand and workload brought on by sales tax holidays, adding additional financial strain to already slim margins.
How State Governments Are Failing SMB Retailers
The challenges SMB retailers face during sales tax holidays are significant enough, but state governments often make it even harder. Sales tax holidays tend to disproportionately benefit large retailers that have the infrastructure to manage complexity and the marketing muscle to drive traffic and profits. Smaller businesses, meanwhile, struggle to compete — they typically lack the logistics to handle increased demand.
One of the biggest issues is insufficient lead time. There is no federal mandate for how much notice states must give retailers before a sales tax holiday. For many SMBs, it can take at least six months to adjust inventory, update systems, and train staff. Yet in 2024, many states gave retailers as little as one month’s notice — some even just days. As a result, an overwhelming 73 percent of retailers reported difficulties complying with these sudden changes. With limited resources and smaller teams, SMBs simply don’t have the capacity to handle such last-minute adjustments, putting them at a clear disadvantage compared to larger competitors that can mobilize entire departments to manage updates.
The lack of uniformity across states compounds these challenges. As mentioned earlier, each state has its own set of rules for sales tax holidays, including differing dates, product exemptions, and price thresholds. For SMBs that operate in multiple states or sell online, navigating these inconsistent regulations becomes a daunting task. State governments do little to harmonize these rules, leaving SMBs to sort out the complexities.
What SMBs Need to Capitalize on Sales Tax Holidays
State governments can take several steps to help SMBs better capitalize on sales tax holidays and reduce the associated challenges.
The most immediate and impactful change would be to provide ample advance notice of upcoming sales tax holidays. Governments should announce these holidays at least six months ahead of time, giving SMBs sufficient time to prepare. Implementing a fixed annual date for these events would allow businesses to plan their inventory, promotions and system updates with confidence.
Additionally, clear and detailed guidelines are crucial. States should publish comprehensive resources on which products are eligible for exemptions, with examples and explanations to clarify any ambiguity. SMBs need straightforward, digestible information, and providing checklists or FAQs would go a long way toward reducing confusion.
To help SMBs compete more effectively with larger retailers, states should consider eliminating price caps during sales tax holidays. Many SMBs, particularly those selling higher-value goods like electronics or appliances, are disadvantaged when price caps exclude their products from tax exemptions. This reduces their ability to attract customers, pushing shoppers toward larger stores offering a wider range of exempt items.
By removing price caps, states can level the playing field, enabling SMBs to benefit from increased traffic and sales. Larger-ticket items are often where SMBs can differentiate themselves, offering personalized service and expertise that larger competitors might lack. Allowing these products to be included in tax exemptions would not only boost SMB revenue but also give consumers more purchasing options during sales tax holidays.
Empowering SMB Retailers to Take Control
Meaningful improvements from state governments won’t happen overnight. In the meantime, SMBs can take proactive steps to prepare for sales tax holidays by investing in a POS system and tax compliance software that leverages the latest technology advancements. These solutions can automate many of the complex processes involved in handling temporary tax exemptions, allowing SMBs to focus on what truly matters: growing and sustaining their business.
At the end of the day, sales tax holidays have the potential to be a boon for all retailers, but only if SMBs are given the tools and support they need to navigate the complexities. By addressing the unique challenges that smaller businesses face, state governments can create a fairer, more inclusive playing field — one where all businesses can thrive.
Scott Peterson is vice president of U.S. tax policy and government relations for Avalara, a tax compliance software provider.
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Scott leads Avalara’s effort to be the first name in sales tax automation. Prior to joining Avalara Scott was the first Executive Director of the Streamlined Sales Tax Governing Board. For seven years Scott acted as the chief operating officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Before joining Streamline Scott spent ten years as the Director of the South Dakota Sales Tax Division where he was responsible for the state sales and use tax, the state’s contractor’s excise tax, the sales and use tax for over two hundred cities, and the sales and use tax for four tribal governments.