Sales Tax Holidays Are Not Profitable for Most Small Business Retailers, Says Report

Small and midsize U.S. retailers face significant challenges when navigating sales tax holidays, according to a new report from Avalara, Inc., a provider of tax compliance automation software for businesses of all sizes. While these holidays are designed to boost consumer spending and businesses’ sales, the complexities involved have actually left nearly 60% of retailers struggling to make a profit.

The report, which surveyed 500 operations and/or financial professionals at U.S. small and midsize retailers, found that while 32% of respondents acknowledged an increase in sales during sales tax holidays, an equal percentage described the experience as a “logistical nightmare.” An additional 32% reported breaking even after dedicating substantial resources to sales tax holiday instances, while 27% indicated they actually lost money during these events.

Small and midsize retailers cited several pain points when navigating sales tax holidays, including:

Staffing constraints: Nearly three in five retailers (57%) need to hire temporary staff to handle the increased demand and compliance rush, while 53% resort to paying overtime to their current employees.
Financial burden: 58% of retailers revealed that their business spends at least $10,000 annually on team, operational, and system processes to prepare for sales tax holidays.
Compliance complexities: 26% of retailers expressed concerns over complying with varying rules and exclusions, and 24% found it difficult to understand the rules and restrictions.
Outdated processes: 26% of retailers say they manually manage sales tax holidays themselves without software.

Another significant pain point identified was the need to adapt to last-minute sales tax holiday modifications by state governments. An overwhelming 73% of retailers reported difficulties in complying with sudden changes, leading to further operational strain. To address these challenges, retailers offered several recommendations for state governments, including issuing guidance at least six months before the holiday (56%), reducing the number of yearly changes (54%), and eliminating price caps (37%).

“Sales tax holidays present, in concept, a unique opportunity for retailers to drive sales, but the complexities involved can turn that opportunity into a significant challenge, especially for small and midsize businesses,” said Scott Peterson, Vice President of U.S. Tax Policy and Government Relations at Avalara. “Our survey data highlight the financial and operational burdens these retailers face, underscoring the need for state governments to provide clearer guidance, lead time, and support to businesses. By working together, we can help retailers navigate the intricacies of sales tax holidays and truly benefit from these opportunities.”

Because of the hurdles, the report reveals that retailers plan to take proactive steps to better prepare for future sales tax holidays. These include starting the planning process earlier (40%), hiring new team members dedicated to tax compliance (35%), switching to more advanced sales tax software (35%), and investing in sales tax software for the first time (25%).

For more information about sales tax holidays and which states have them, visit here.