Back-to-school underscores tax-free dilemma - State-mandated marketing initiatives

DSN Retailing Today, August 26, 2002 by Mike Troy

HOUSTON--The scene at the Auchan Hyper-market south of downtown Houston was pandemonium at noon on Friday, Aug. 2. Frantic customers, most with kids in tow, jammed the apparel department and the aisles of a nearby back-to-school department. It was the first day of a three-day, tax-free weekend in Texas, and thanks to state lawmakers, Auchan had scheduled extra employees to stock shelves and run registers to keep up with the feeding frenzy of customers eager to avoid paying sales tax.

The scene in Texas was repeated to varying degrees in seven other states and the District of Columbia during August, where each offered different versions of tax-free holidays. Yet therein lies the challenge for retailers, especially those with national or expanded regional operations. Because the programs lack uniformity, retailers face administrative and operational challenges to implement state-mandated marketing initiatives for which seemingly no documentation exists to support their effectiveness. No two states offer the same program at the same time, and none are held for the same duration with the same items. Therefore, retailers are required to make adjustments to their information systems to assure that customers are charged the appropriate amount of tax.

The program in Connecticut, for example, exempts apparel and footwear purchases under $300, while in Iowa the limit on the same items is a much lower $100. Some states, such as Texas, Iowa and Connecticut, exempt only apparel and footwear purchases and not school supplies, an ironic fact considering the programs are scheduled during the back-to-school period. States such as West Virginia, Georgia, North Carolina, South Carolina and the District of Columbia exempt school supplies, but set different limits on the amounts of purchases and what qualifies as supplies.

A spokesman for a major national chain said the programs are a mixed bag for retailers because, on the one hand, customers like and respond to them, but, on the other hand, they are logistically very challenging, with states subjecting such basic items as notebooks to different definitions.

Those challenges are largely behind the scenes, while operational headaches of the tax-free holidays are more visible in stores. As evidenced by the Auchan store in Houston, the demand peaks created by the tax-free holiday forced the retailer to load up on inventory and schedule more people to work on the sales floor and at checkouts. Auchan set up a 40-foot counter in front of rows of shelving loaded with khaki and navy school uniforms to accommodate the onslaught of customers.

"Operationally, it is very difficult and we have to plan for it months and months in advance," said Chris Bostad, marketing and buying office director of Auchan USA. "We require everyone in the company to work that weekend otherwise operationally we couldn't do it."

Aside from these issues, there also are doubts whether the tax-free periods actually increase sales or simply concentrate sales that would have taken place anyway into a narrower period of time. The back-to-school selling period is already a key seasonal event for many retailers and it will continue to grow in importance with enrollments expected to rise for the next several years. The U.S. Department of Education places the number of elementary and secondary students attending public schools this year at about 47.4 million. And a recent survey by the International Mass Retail Association indicates the average household spent $483 on back-to-school merchandise this year, a 5.4% increase from last years average household expenditure of $458.

Parents are going to shop for back-to-school merchandise regardless of whether they pay tax on their purchases so the debate on the programs and their timing during the back-to-school season will remain an issue. For the time being, though, it appears the number of states offering programs will stabilize and may even decline next year. The programs emerged during the late 1990s when the economy was booming and states were flush. That situation has changed, according to John Logan, a senior state tax analyst with CCH Inc., a tax and business law information provider.

"Almost all the states are facing severe revenue shortfalls," Logan said. "The economy is going to be the driving factor of whether we see more of these programs because if politicians are up against the wall next year, then sales tax holidays will be even less attractive."

Logan expects roughly the same number of states will offer programs next year as new states adopt programs that offset those that discontinue them. Such was the case this year as North Carolina adopted a tax-free period and states such as Maryland, Pennsylvania and Florida dropped their programs. Florida's program was one of the most extensive, extending for nine days during each of the past four years.

In 2000, when certain school supplies, apparel and footwear costing less than $100 were exempt from sales tax, the state lost approximately $41.2 million in revenue, according to the Florida Department of Revenue. Last year, to reduce its losses, the program was tightened up to include footwear and apparel costing less than $50 and school supplies costing less than $10. As a result, the tax revenue lost at the state and local level declined to $28.5 million.