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Sunday, August 28, 2011

Sales Tax Holiday in Missouri (and elsewhere) - A Tax Oddity

I have written about this before and included it in my list of "tax oddities" - states offering "holidays" when sales tax is not owed on certain items. Generally, they last just a few days and only apply to specified items.

Thomson Reuters has a list of the holidays - here. The Tax Foundation has an extensive report (July 2011) that lists state holidays and explains why the holidays are poor tax policy.

States not only lose revenue, retailers have extra recordkeeping and reporting burdens, inequities result - as just a few of the problems. But, there is also the problem that whenever anything is carved out for special tax treatment, it is usually complicated to define what gets the special treatment and what does not.

A recent example is Missouri which offers a sales tax holiday in early August to help families purchase school supplies (the "Back to School Sales Tax Holiday"). And this is another example of the oddity - it doesn't matter what your income level is - everyone gets the tax savings. That means there is less of the benefit to go to those who really need it because the state gave some of the benefit to people who don't need it.

Here is an explanation of the sales tax holiday from the Missouri Department of Revenue - Section 144.049. As indicated in that explanation, the holiday includes personal computers that do not exceed $3,500.

Well, a question was raised by a retailer as to whether an iPad and e-book reader would qualify for the sales tax holiday. So the Missouri Dept. of Revenue had to devote time and resources to answering this question. The answer is in LR 6870 (7/29/11):
  1. "The definition of personal computers includes the Apple iPad and Apple iPad2 because they are akin to a laptop computer and are used to perform functions traditionally associated with a personal computer."
  2. "Book readers that download off the internet are not personal computers because they are not akin to laptop, desktop, or tower computer systems, and are not used to perform the functions traditionally associated with personal computers."
Why the difference? Missouri law (Section 144.049(2)) defines a "personal computer" as:

"a laptop, desktop, or tower computer system which consists of a central processing unit, random access memory, a storage drive, a display monitor, and a keyboard and devices designed for use in conjunction with a personal computer, such as a disk drive, memory module, compact disk drive, daughterboard, digitalizer, microphone, modem, motherboard, mouse, multimedia speaker, printer, scanner, single-user hardware, single-user operating system, soundcard, or video card."

To bad for the Kindle, Nook and other readers that aren't really a computer. But can't these items be school supplies?

Missouri law defines "school supplies" as "any item normally used by students in a standard classroom for educational purposes, including but not limited to textbooks, notebooks, paper, writing instruments, crayons, art supplies, rulers, book bags, backpacks, handheld calculators, chalk, maps, and globes. The term shall not include watches, radios, CD players, headphones, sporting equipment, portable or desktop telephones, copiers or other office equipment, furniture, or fixtures. School supplies shall also include computer software having a taxable value of three hundred fifty dollars or less."

Sounds like the Kindle or Nook could be a school supply. BUT - the sales tax holiday only applies to supplies that do not exceed $50 per purchase!

What about buying an iPad during the 3-day sales tax holiday but having the parent use it rather than the school child? What if both use it? I could not find any prohibition on this. And, it would be difficult to enforce. Another problem with such holidays - they are easily abused. And trying to find some way to enforce that the items purchased must be used by school children is difficult.

A better approach - use an approach similar to the free or reduced lunch program states likely already use. It requires the family to file a form indicating need. These families could be given vouchers/coupons/gift cards to use for school supplies.

What do you think?


states tax filing said...

It really tenders no benefits to retailers. I see more booking nightmare, additional software costs to change the rates and more errors proned to reporting and handling exemptions.

states tax filing said...

It really tenders no benefits to retailers. I see more booking nightmare, additional software costs to change the rates and more errors proned to reporting and handling exemptions.