How to Decide if Travelling to a Sales Tax Holiday is Worthwhile

A recent commenter on our sales tax holiday article over at Raising4Boys lamented:

I live in Arkansas and we do not have the tax free weekend. It makes it so much harder on me to have to travel to different states to try to catch a good sale. With gas prices continuously on the rise, by the time I make it to the sale i have already spent $100.

Which got me to thinking… How far would you willingly go just to take advantage of a sales tax holiday or or sale that gives a small percentage off? Surely $100 is an overstatement, but lets just run with it…

My initial reaction was that there’s no way that someone in their right mind would drive that far for a tax holiday. Indeed, assuming that $100 covered the roundtrip (the situation is far worse if it’s each way), you’re looking at roughly 33 gallons of gas (@ $3/gallon). If you get around 20 mpg, then you’re looking at 660 miles of driving. Of course, this ignores the cost of wear and tear on your car.

In order to get a more realistic look at the true cost of driving, let’s use the federal mileage rate for 2007 of 48.5 cents per mile. At $100, this works out to 206 miles. Much more reasonable. Or is it?

Let’s further assume that you live in a state that has a 7% sales tax rate. In order to offset that $100 expenditure (ignoring the value of your time), you’ll have to spend at least $100/0.07 = $1428.57 (less if your tax rate is higher, and more if it’s lower).

So you tell me… Is it worth driving any great distance to receive a small percentage off your purchase?

For those that are interested, here’s how the math breaks down:

Step 1 – Estimate the amount of additional driving (roundtrip, of course).

Step 2 – Estimate the cost of those additional miles, as follows:

Extra Mileage Cost = Extra Miles x 0.485 Dollars/Mile

Step 3 – Estimate the amount of extra time involved.

Step 4 – Estimate the cost of this extra time (if you love driving, this might even be zero):

Extra Time Cost = Extra Driving Time (in hours) x Value of Your Time (in Dollars/Hour)

Step 5 – Estimate how much you’d have to spend to break even:

Breakeven Expenditure = (Step #2 + Step #4) / (Percent Savings / 100)

So if you’d have to drive an extra 100 miles at $0.485/mile, and it would take you an extra hour of driving at (say) $10/hour, then your breakeven point is:

($48.50 + $10) / (7 / 100) = $54.25 / 0.07 = $789.28

That’s right. In order for a 50 mile side trip (100 miles roundtip) to be worthwhile, you’d have to make nearly $800 in qualified purchases just to break even. Sure, this would be less if you base it just on the cost of gas, but wear and tear is a real thing. For some people this might be worthwhile, but for others it’s pure folly.

Is it being overly-anal to calculate things like this out to the penny? Probably. But the larger point still stands. Don’t be penny wise and pound foolish. Driving great distances just to save a few dollars is not a smart move.

By all means, if your state offers a sales tax holiday, take advantage of it. And if you’re making huge purchases but live in a state without a sales tax holiday, it might even be worth driving a bit to get to reach a tax-free zone. But keep in mind that a great many online retailers effectively have sales tax holidays each and every day. Ever heard of Amazon.com?

And yes, I realize that most states technically require you to pay sales and use tax for online purchases when you file your taxes, but the same is also true of out-of-state purchases. Regardless, I promise that I won’t report you. 🙂

8 Responses to “How to Decide if Travelling to a Sales Tax Holiday is Worthwhile”

  1. Anonymous

    Generally you can also find better deals in the same stores at other times of the year than you can find on the tax holiday. My state sales tax is 5%. If I can find a TV that I’ve had my eye on for 10% on a non-tax holiday versus full price on the tax holiday, the choice is obvious. I wonder how many non thinking consumers will be fooled by this…

    Also consider that many states have caps on the amount of stuff you can buy, so you might end up at the breakeven point in your calculation and find that you’re at the tax exempt limit and not be able to save anything.

  2. Wow, you have a really short attention span, don’t you? 😉

    “And yes, I realize that most states technically require you to pay sales and use tax for online purchases when you file your taxes, but the same is also true of out-of-state purchases. Regardless, I promise that I won’t report you.”

    Yes, you’re supposed to pay home state sales tax for online our out-of-state purchases.

  3. Anonymous

    Oh sorry… I missed that.

    Once I assign a value for my time I don’t think driving anywhere can be worth. Only on REALLY big ticket items and almost all of those get taxed by my home state anyway.

    Aren’t you supposed to pay your home states sales tax anyway on nonperishables?

  4. @RateLadder: Um, no… It doesn’t ignore the value of your time. Look at Step 3 and 4.

    Step 3 – Estimate the amount of extra time involved.

    Step 4 – Estimate the cost of this extra time.

    It’s up to you to assign a value for your time, but once you’ve done that it’s dead easy to incorporate that sort of cost.

  5. Anonymous

    It isn’t worth it even if I am making a large purchase because I would report myself so I’d still wind up paying taxes for it.

    The bigger issue, of course, is that it isn’t worth the time it would take to get there and back, ignoring any savings.

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