Tax Reform, Tax Free Weeks – An unlikely pairing



Is tax reform possible? Would it actually stimulate the economy? Would it cut down on lobbying, and pandering to taxpayers with things like "Tax free weeks?" And do these tax free weeks actually stimulate the economy?


To help us answer these questions, we are examining Connecticut's sales tax holiday.


Connecticut Tax Free Week

2016 marks the 17th year of the 'Tax Free Week' in Connecticut. It is an annual one week sales and use tax exclusion for clothing and footwear costing less than $100 per item (changed from $300 in 2015 and years prior). This year it runs from August 21st through August 27th. The exclusion applies to each item of (qualifying) clothing or footwear.


What's included? And what's not?

To sum up, generic clothing items like jeans, blouses and shirts, dresses, ear muffs (being prepared is everything), socks, shoes and sneakers are included. If you're looking to answer more specific questions like:


  • Is antique clothing included?
  • How about wedding dresses, rubber boots, or square dancing clothes?


You can check out the full list here (by the way, yes to all of the above). There's a nice surprise on this list as well – diapers. If you have a child, you know just how quickly this expense adds up…so take advantage of that one!


Other rules

  • Price after sales and coupons must be under $100, but rebates don’t count
  • Rain Checks
    • Items that cost less than $100 that are purchased during the exclusion week using a rain check are not taxable.
    • If the rain check is given during the exclusion week for an article of clothing or footwear costing less than $100 and the customer purchases the item after the exclusion week has ended using the rain check, the item is taxable.
  • Layaway
    • If the item costs less than $100 on layaway during the exclusion week, the item qualifies for the tax exclusion, and none of the customer’s payments on the item are taxable even if they are made after the exclusion week. The item will not be taxable when the customer takes delivery or possession of it.
    • If the item was put on layaway prior to the exclusion week and the customer takes possession of the item during the exclusion week, the item does not qualify for the exclusion, even if its total cost is less than $100.
  • Buy one get one free, or buy one get one half off
    • Each item must cost less than $100. You cannot average the cost between the two items.
  • Mail Order, Telephone, and Internet Sales
    • Tax does not apply to the sale of an article of clothing or footwear costing less than $100 sold during the exclusion week by mail, telephone, or over the Internet.
  • Exchanges
    • If the item is purchased during the exclusion week and the customer exchanges the item for a like item after the exclusion week, the exchange is not taxable (provided the sales price of the like item is also less than $100). A like item is the same item with a different style, different size, or different color (such as a shirt for a shirt).
    • If the item is exchanged after the exclusion week for a different type of clothing item (not a like item), the exclusion does not apply.


The State of Connecticut posted all the details in an Informational Publication found here.


The administrative burden of tax holidays

It's a fair question to ask, what good are these holidays if we can't figure out what is exempt and what is not?


For example, imagine that you are not some large retailer who can afford the attorneys, accountants, consultants to figure out these rules, but rather, you own a bike shop with a few employees. You sell biking apparel, and some of your clothes and footwear is sales tax exempt for the week and some is not. Try to figure this out: according to the Department of Revenue Service, bike shoes sold without cleats are exempt from sales tax, but bike shoes sold with cleats aren't. As you look at you inventory, you notice that none of your shoes come with cleats. However, some of them have holes in the bottom where you can attach cleat to. (And you sell the cleats). You think to yourself, "ah… so all of my shoes under $100 must be exempt."


But then you think to yourself, "but there are actually no bike shoes in the industry that are sold with cleats attached, so why have this rule?" You think that maybe the rule means if the shoes are cleat compatible. But the rules don't say compatible. So what does it mean? Do you risk not collecting sales tax from your customers? If you are put under a DRS Sales and Use audit, will you be penalized for giving your customers a break they weren't entitled to?


Maybe, just maybe we could start by reducing the Connecticut sales tax rate from the cumbersome 6.35% to the less gruesome 6% and ditch the entire sales tax holiday.


IRSMedic.com is the website for Parent & Parent LLP, a tax law firm of IRS resolution attorneys, Certified Public Accountants, and Enrolled Agents who want to be the team that permanently resolves your tax problem where others have failed. We have developed a proven system of solving any tax problem in the least amount of time, for the smallest amount of headache. We serve US taxpayers worldwide for IRS, US Tax Court and state revenue agency issues.