The 2022 wedding season is expected to be a record breaker, with an estimated 2.6 million weddings taking place. Now more than ever, with your business likely growing, it’s paramount for wedding retailers to ensure that their sales and use tax obligations are being met. After all, no one wants compliance obligations to bog down your business, especially when you are at your busiest.
According to a study done by The Knot, 65% of weddings this year will take place in the summer and fall. That means we’re almost at the peak of an unprecedented nuptial season and your organization may start to see an increase in wedding-related sales. We’ve provided some tax-related information intended to help you understand whether changes to your compliance process should be on your radar.
Dresses and Tuxedos
Everyone needs to be sure they are collecting and remitting sales tax correctly, and since every state has its own rules, compliance gets trickier as you sell into more places. For example, clothing and footwear are taxable at standard rates in most places, but seven states have special rules. In some of those states, clothing is completely exempt, in others it’s only exempt up to a certain price.
The complexities don’t end there. In Connecticut, clothing is exempt if the price per item is less than $50. However, if the article costs more than $1,000, it is subject to a special luxury tax rate of 7.75%. In Pennsylvania, most clothing is fully exempt from sales tax, unless it’s formal wear, which remains fully taxable.
Clothing is also frequently included in sales tax holidays, which occur throughout the country. Those days are mostly (but not always) in July and August. During these special holidays, otherwise taxable clothing can be purchased tax free if under a certain price. If the bridal party has timed their purchase to coincide with a sales tax holiday, they will definitely want their vendor to get the tax right.
There is also the growing designer rentals industry. While renting tuxedos has been the norm for decades, dress rentals are experiencing a surge in popularity. More brides have stopped purchasing their gowns outright and are instead opting to rent their dresses from designers that would otherwise be far outside of their budget.
In many states the tax rates that apply to clothing also apply to rentals, but not everywhere. Delaware is an example of the added complexity posed by rentals. While the Diamond State doesn’t have a sales tax, it does have a rental tax that would apply on clothing rentals. There are similar complexities relating to rentals in Alabama, Illinois (including the city of Chicago) and Maine. Incorporating a tax engine that ensures accurate real-time tax calculations can help ensure compliance throughout the wedding season.
Online registries are all the rage. Last year, wedding guests spent an average of $160 on gifts from wedding registries. Guests no longer have to buy dining sets and linens from the individual sellers directly, but rather can visit a centralized registry and purchase gifts from multiple vendors, having the item shipped directly to the newlyweds. This way, their guests can easily purchase customized monogrammed gifts from Etsy, kitchen appliances from home improvement stores and even honeymoon excursions, all from a single source.
A few short years ago, these “marketplace facilitators” would not have been responsible for collecting tax, but that has all changed. Today, every state with a sales tax has a law or rule on the books requiring companies like these to collect and remit tax on behalf of the vendors they support. While the registry shopping process may have become easier, a sticky tax situation remains.
Does your business have the ability to address shipping and handling charges, and can it decipher when those charges are taxable and when they are not? Perhaps you sell a product that’s on a registry, and the newlyweds return it. Does your sales tax software keep up with regulatory requirements related to returns and tax refunds? Some states, like Connecticut, don’t allow sellers to refund sales tax to the consumers if the return occurs more than 90 days after the purchase, and it’s your responsibility to keep track of the timeline.
Putting a Ring On It
While the age-old “three months’ salary” rule isn’t necessary when it comes to ring purchases, Americans spend an average of $3,756 on engagement rings. Furthermore, a survey conducted by Brides found that rings are tied with venues as the largest part of a wedding budget. Because of this, consumers might be watching for applicable sales tax holidays before buying rings.
Jewelry is not included in most sales tax holidays, but it is in Massachusetts where virtually everything is tax free for a few days a year. Jewelry is also included in the annual Arkansas sales tax holiday during early August. If you are in the ring business, also know that jewelry sizing and engraving can all be subject to special tax rules depending on whether you are buying the ring at the same time. Finally, the Connecticut Luxury Tax mentioned above also applies to jewelry priced over $5,000.
As more couples prepare to walk down the aisles, now is the time to ensure that your business is set up for success. Make sure you know where you’re selling, the rules for each state, and whether you’re managing your sales tax obligations correctly. The last thing you want is for noncompliance to hinder your business in the middle of a potentially very lucrative season.
As VP, regulatory analysis and design at Sovos, Charles Maniace lives and breathes tax. For him, job No. 1 is ensuring Sovos customers remain fully compliant as rates, rules and requirements change around them. Maniace places a premium on making time to share his expertise, wisdom and insight as a means of facilitating career advancement within the Sovos organization and in increasing regulatory understanding in the broader Sovos community.