Pulp Taxation

Michael O'Hara

It is August 16 and, I suspect, if you are reading this, you are doing so from your iPad or Blackberry on a beach chair somewhere. When you finish this Big Story, perhaps you will reach into your beach bag for that summer novel you have been itching to dig into: you know the one with the compelling hero, mysterious strangers and malevolent villain. Your novel is a great action adventure, most likely, and one that will draw you to turn pages obsessively until its happy ending is revealed on the last page.

To help with this transition, I should write about the developing sexy story surrounding Barnes & Noble, significant parts of which were revealed to the public this week. After last week’s unusual public announcement that the company would hold itself open for sale, this week’s wrangling between activist investor Ron Burkle and his Yucaipa Cos. investment firm and B&N’s founder, Len Riggio, had all the drama of the great pulp fictions. So far in the story, there has been a proxy war, a court battle, an armistice and a series of public attacks, both before and after the armistice.

This is what I should be writing about. Instead, I have decided to write about the riveting topic of sales tax holidays. (Hollywood: I await your call to discuss movie rights.)

This past weekend, Massachusetts implemented a sales tax holiday covering most items with a cost of $2,500 or less. Last year, as stimulus money was being doled out liberally to other commercial segments, the Commonwealth’s retailers urged the governor to implement such a holiday. The Bay State countered by not only foregoing a sales tax holiday in 2009 (the first year without one since 2003), but also increasing the sales tax rate from 5.0 percent to 6.25 percent. The state’s retail community complained that this would drive increasing numbers of consumers to shop to the north, in tax-free New Hampshire, or to the Internet, harming local retailers and increasing unemployment.

Massachusetts joins 18 other states that have implemented sales tax holidays in 2010 on various items, two more states than did so in 2009. Some states offer the holidays broadly, others limit the benefit to certain merchandise categories. Louisiana, for example, had a holiday on hurricane preparedness items under $1,500 on May 29 and 30, while South Carolina has a holiday scheduled for sales taxes on gun, rifle and handgun purchases on November 26 and 27 (probably a good time for the local turkey population to migrate to Georgia).

The Massachusetts Retailers Association told New England Cable News that it expects stores to see an increase in sales during the tax holiday of as much as five times a normal August weekend’s receipts, accounting for hundreds of millions of dollars of incremental sales. The Boston Globe reported that tax holidays have provided consumer savings of between $20.0 and $23.0 million in past years. For a normally dead weekend for retailers, this amounts to Christmas in August.

Sales taxes are very important to state governments. The U.S Census Bureau reported that total state tax collections amounted to $715.2 billion in 2009. Of this amount, $228.1 billion (31.9 percent) came from general sales and gross receipts taxes. Importantly, as the recession strengthened, U.S. sales taxes collections declined 5.4 percent in 2009 compared to 2008, a drop of approximately $13.0 billion to state coffers. State tax receipts are used to fund schools, police, fire and other state and municipal services. States (and the municipalities who benefit from distributions from their states) are, therefore, understandably reluctant to give up on revenues in this economy, especially as they see declines in other revenue streams contemporaneously. They must balance their interest in direct revenue generating sources against indirect revenue (payroll taxes from increased employment/decreased unemployment), corporate citizen demands (i.e., retailer citizens), consumer relief and competing non-taxable interests (the Internet and adjacent states). Massachusetts, for its part, only determined to implement its sales tax holiday in 2010 after the federal government agreed to grant the Commonwealth $608 million in stimulus funds for its state Medicaid program. Without this aid, Governor Deval Patrick stated he could not justify the loss of the sales tax revenue for one weekend in August.

The government’s thinking around the topic of sales tax holidays is interesting, but so is the consumer’s. The increase in foot traffic during these holidays is statistically significant. And yet, all we are really talking about in Massachusetts’ case is a mere 6.25 percent off sale. In this age of austerity, as retailers compete no longer for growth but stability (and oftentimes survival), the consumer is offered savings at this level or greater on a regular basis. In fact, one could argue that if any one retailer promoted a “6.25 percent off sale,” it would be met with only lukewarm interest from its customers. Indeed, a state sales tax holiday can be expected to catalyze significantly more foot traffic for a retailer than if the retailer had a 20 - 30 percent off sale. Why is this? Here are a few thoughts:

First, a sales tax holiday is broadly promoted by the government and the news media. Money cannot buy advertising that equates to a governor issuing a proclamation declaring the 6.25 percent sale, nor the value of every news organization covering the sale in the content section of their publications (as opposed to in the ad circulars that accompany them).

Second, the sales tax holiday is a sale across the board, covering nearly all retailers. This enables consumers – who are as time-starved as they are cash-strapped – to get their discounts in every store they shop in, not just the one holding a sale on a particular day. The frugal shopper can go door-to-door comforted in the knowledge that she will be getting a deal at every stop.

Third, consumers want to participate in a government “freebie” program. This may stem from any number of psychological forces: the desire to make sure that I get something that others are getting; anger or frustration directed towards the government; loyalty or affection for a retailer (i.e., the government takes the hit, not the store) or simply sharing in a communal activity.

Finally, perhaps there is a feeling that a sales tax holiday is a “real” savings, whereas traditional retail discounting can feel like a gimmick or a trick. There are a myriad of laws intended to ensure that retail sales promotions offering discounts are truly discounts from real, normal prices and not fictitious discounts promoted to drive foot traffic. These laws are there for a reason; most people have been victimized by a “sale” that wasn’t really a sale at some point in their lives.

From the perspective of the retail industry, sales tax holidays amount to its participation in the government’s economic stimulus programs. In this regard, it is akin to the benefits the construction trade gets in something like the various roads programs. [It should be noted, however, that this stimulus benefits only brick-and-mortar retailers, not e-commerce and catalog retailers, who generally do not have to pay state sales taxes (unless they have physical nexus to the taxing state).] Like other stimulus measures, there are real questions about whether sales tax holidays produce incremental revenue for retailers or merely shift forward sales that would have otherwise happened at later times. If the latter, then it can be said that the stimulation provided by the states may be more psychologically than economically beneficial. But mere psychological benefits can matter, too. Remember, there will be elections in November. . .