Well they did it. The Massachusetts’ sales tax increase from 5% to 6.25% was approved by the Senate on May 19, 2009. This 25% increase will become effective July 1, 2009. The sales tax will not apply to groceries, prescription drugs or to clothing items valued under $175. The senate also approved the removal of the sales tax exemption on alcohol and is also allowing cities and towns to impose a 2% local tax on meals and lodging.
So what does this increase in the sales tax mean for you as a consumer or a business owner? What does it mean to you during this recession? The economy is already tight and the tax increase will certainly increase the price of goods for consumers. This comes at a time when consumers are already dramatically cutting back on purchases both discretionary and non-discretionary, facing job losses, heavy debt, pay cuts and increasing their savings rates.
Last spring, we saw how price sensitive consumers were when gas prices were $1.50 more per gallon. As a result, consumers dramatically cut back on driving, dumped their SUVs and cut back on general spending. Depending on your income level, the sales tax increase will have a significant impact on your household budget. What item in your budget will this increase impact? Hopefully, it’s not your savings rate. Have you deferred the purchase of any big-ticket items? Maybe you should buy them now rather than later.
Or for business owners, like many, have you been holding off on capital expenditures until the economy picks up? That $800 laptop you’ve been thinking about will increase from $840 to $850 at 6.25%. If you have to buy several for your employees, that will begin to add up. That new $32,000 company truck goes from $33,600 to $34,000 with the tax hike. And if your business is located near sales tax-free New Hampshire or it sees a lot of competition from the internet, you’re even more sensitive to the increase.
If you’re in the hospitality industry, your city might choose to impose a local tax on meals and lodging. Will a 2% local option tax put you at a disadvantage to a competitor in a town that chooses not to impose such a tax? If you own a hotel, will this impact the number of visitors to the state? To your city?
Some personal tips to consider during these times:
- Update your household budget. What item will be impacted?
- Factor into your household budget the increase in eating at a restaurant in a town that chooses to increase the meals and lodging tax.
- Will there be a sales tax holiday this year? If so, take advantage of it for your big ticket items.
If you own a business, you may want to consider the following points:
- Don’t forget to update the sales tax rate in your accounting software on the July 1, 2009 effective date.
- If you sell alcohol, you’ll need to start collecting, reporting and paying sales tax on that item.
- Weigh the option of absorbing the price increase in order to provide a competitive advantage over your competitors.
If you’re looking for the nitty-gritty on what the sales tax increase might mean for the Massachusetts economy, the Retailers Association of Massachusetts hired the Beacon Hill Institute to prepare a study called The Economic Consequences of Increasing the Sales Tax in Massachusetts to 6% (April 2009). The study concludes that a 20% increase to a 6% sales tax rate in Massachusetts will destroy 10,000 jobs and $41 million in investment. The rate that was approved is higher at 6.25%.
