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Such a Deal!

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The parking lots of Walmart, Target, Kohl’s and the super-mall were all packed last weekend. It was Virginia’s annual Back to School Tax-Free Weekend. School supplies priced under $20 and clothing and shoes costing less than $100 were exempted from the 5% sales tax. Protective items, sports equipment, and computer products were excluded. There was no limit on the total you could spend. The only restriction was that each item must be priced below the $20 school supply ceiling or $100 clothing and shoe ceiling. I wondered if that meant only children’s clothing, so I went to the Virginia Department of Taxation’s website’s Q&A page.

For the school supplies exemption, must the item be intended for use in school or in connection with a school activity to receive the exemption?

No. The item need not be intended for use in school, nor must the item actually be used in school activities to qualify for the school exemption. So long as the item is one listed above, does not exceed the threshold cost, and is purchased during the sales tax holiday period for clothing and school supplies, the purchase will not be subject to sales tax and use tax.

That sounded odd, so I took a look at the tax-exempt items and found that they included:

• Baby Bibs, clothes, receiving blankets and diapers (including disposable diapers)
• Clerical vestments, altar and choir clothing
• Corsets and corset laces
• Dresses (including formals)
• Fur coats
• Wedding apparel (including veils)

It’s a stretch, but I can see how choir robes and homecoming gowns could be school related. Baby stuff? Well, maybe the baby’s going to day care and so that could be considered school in a way. I have a hard time envisioning what kind of fur coat would sell for under $100, so I’m not going to worry about that one. But surely I’m not the only one who finds inclusion of corset and corset strings and bridal veils as part of a Back to School Tax Holiday sort of kinky. Where does one go to purchase corset strings in the first place? I’m thinking serious dress code violations!

If the inclusions are rather odd, the items NOT eligible for tax relief seem even less logical:

• Bandanas but not handkerchiefs
• Beach caps but not umbrellas
• Binders but not thumb drives
• Caps but not hard hats
• Compasses but not computers
• Garter belts but not safety belts
• Legal pads but not computer paper
• Watercolors but not printer ink

Sometimes laws, once on the books, can become archaic. But this one’s only four years old, so one has to wonder why it seems to ignore the role of technology in education. You can buy a calculator, but it’s a school supply item, so it can’t cost more than $20. A Victoria's Secret nightgown that cost $89.99 is tax-exempt, but a graphing calculator a priced at $89.99 is not. Go figure.

Ohh..so maybe this isn’t just about education?

I never determined who created the exemption/exclusion list, but an article in Sunday’s Washington Post helped clarify the matter.

"We have found that sales tax holidays have been tremendously successful at drawing customers into stores and getting them to spend," said J. Craig Shearman, spokesman for the National Retail Federation, an industry trade group. "Americans have hated paying taxes all the way back to the Boston Tea Party."

Ohhh…….so this isn’t just about the kids who get the education?

But it is nice to save a little money, and no taxes does sound like a good deal. So, let’s do a little math here. The National Retail Federation estimates that back-to-school shopping translates into about $548.72 per family. Virginia has a 5% sales tax. That means that the family will not have to pay $27.44 in taxes. Now what if the store had reduced their prices by 5% and the family did have to pay sales tax? The $548.72 bill would be reduced to $521.18 and, at 5%, our family would have to pay $26.05 in sales tax. That comes to $547.34 which means that their actual out of pocket expense went down by $1.39.

Ohhhh……so this isn’t just about the cash strapped parents?

Keeping straight about what is and isn’t exempt can create a real hassle at the checkout counter and may result in customers putting merchandise back. Some retailers opt to pay the taxes on merchandise that is excluded from exemption but purchased on the Back-to-School Tax Free Holiday weekend to avoid problems and build good will. That $700 computer your children needed? Go ahead and put it in the cart and the store will cover the $35.00 in taxes, in effect discounting the price by 5%. Rather than $735.00, the consumer pays $700.00 and goes home happy.

"If retailers were to hold a sale and say, 'Everything is 5 to 6 percent off today,' our customers would laugh at us," Shearman said of the tax breaks. "There's a psychological appeal that goes far beyond the amount of money involved."

Ah…..so this is actually all about marketing.

Well, you can’t blame the merchants. Their job is to sell their merchandise for the best profit they can get. To be fair, it's not as if they tricked anyone; after all, I figured this out and I was never good at math. They just told us what we wanted to hear. Shearman is right; while most people won’t get excited about a 5% sale, TAX FREE sounds like a great deal! You can outsmart the tax man and save a few bucks. NO TAXES is such a distraction that we don’t take time to calculate the real costs.

But the costs are real. Sales tax exemption is a regressive tax policy that offers less relief to the family on a tight budget than it does to those with more disposable income. The $27.44 per household that was “saved” is $27.44 that did not go into state and local coffers to pay for those schools that the kids are going back to. In Virginia, localities cover about 70% of education expenses and the primary source of that money is property taxes. For a family on the brink, a pair of tax exempt $95 sneakers is a discretionary purchase, paying property taxes is a fixed expense. The unintended consequence of a Tax Free Holiday IS that, in exchange for the illusion of savings, the taxpayer may forfeit his ability to control his expenses along with the benefits that taxation purchases.

Back in 1980’s Douglas Hofstadter coined the term innumeracy -- and Innumeracy: Mathematical Illiteracy and its Consequences by John Allen Paulos was a best seller. Hofstadter and Paulos proposed that being able to do the math didn’t necessarily result in understanding what the numbers mean. And, if we don’t know really know what the numbers mean, then rather than informing, numbers can easily misdirect us.

I checked -- a used copy of Innumeracy goes for as low as $3.00 (plus shipping and handling and sales tax where applicable).

Such a deal!

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P.T. Barnum is quoted to have once said "There's a sucker born every minute".

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