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The disadvantages of sales-tax holidays

Anyone who gambles or invests knows the old saw about life's only certainties being death and taxes. In Massachusetts this weekend, taxes aren't so certain.

But for a consumer who doesn't understand a sales-tax holiday the unintended consequences of "good deals" can be financial death.

Sales-tax holidays are increasingly popular around the country, with more than a dozen states having tried them in recent years. Rules vary from highly restrictive -- giving little more than a break on back-to-school purchases -- to big-ticket windfalls, but the idea is to get the consumer to buy like crazy.

Any sales promotion, whether it is a break on sales taxes or a coupon, or a big discount, has potential downsides.

To understand the dark side of any discount/coupon/price-break issue, you need to know the rules. For Massachusetts' first-ever tax holiday, the rules are simple: On Saturday, the state's 5 percent sales tax is being waived on items that cost $2,500 or less, excluding automobiles, boats, motorcycles, utilities, and restaurant meals.

The tax holiday applies to personal items -- buy an item costing more than $1,000 and you must sign a document stating the purchase is for personal use only -- and all purchases must be paid for in full.

Based on tax-free days in other states, consumers will save a total of $6 million to $10 million on expected sales of $120 million to $200 million.

The tax holiday is particularly valuable for someone buying big-ticket items that can now be purchased at a significant discount. The trouble arises in a few places.

Jon Hurst, executive director of the Retailers Association of Massachusetts, notes that a big reason why his group pushed for the tax holiday was to capture impulse buys. Consumers who had planned to buy something this year may accelerate the purchase, but that's not a big net gain for retailers, as they get the money today but don't capture any extras. The retailers' big gains come from unplanned purchases, where consumers drop their dollars now because they think they'll never see this kind of bargain again.

Consumers are right to question just how big any bargain is, using real dollars as their guide.

That's why Marie from North Attleborough asked in an e-mail message whether it makes sense to do most of her holiday shopping on the tax holiday. Bill in Boston wondered about financing options available on a big computer purchase, and planned to "buy more computer" because of the money he won't spend on taxes.

The answer to both of them is: It depends on personal circumstances.

That may be a cop-out, but it's why any consumer looking at a special coupon, discount, or other save-while-spending gimmick has to do some math to see if the deal is really worth it.

In Marie's case, being an early shopper could be pure windfall, provided she has the cash now. Let's say Marie winds up spending $1,500 on credit and plans to pay that back over three months. Her tax savings at the register is $75.

If she is paying $500 as soon as she gets the first bill, you'd expect her to be facing interest charges on $1,000. But the way most credit card issuers calculate interest involves average daily balance, so that if she charges $1,500 today and fails to pay it off entirely when the first bill is due, her first month's interest will be based on an amount closer to $1,500 than $1,000.

Consumers should estimate their average daily card balance based on how they will pay the bill, and multiply that amount by the monthly interest rate on their card. In Marie's case, with a card charging about 12 percent annually, her borrowing costs on the $1,500 will amount to about $30.

She saves by shopping for Christmas in August, provided she pays the bills off on time. The more she spends and the longer she takes to pay it back, the less she saves.

Bill is wondering whether a "six months same as cash" deal makes sense for the computer purchase.

Clearly, no taxes and no finance charges is the best of all worlds. The only worry is missing a payment or needing to stretch financing out longer, at which point the finance charges applied to the account will go all the way back to the purchase date and the interest costs quickly outstrip the tax savings.

As for Bill's plan to "buy more computer," he'll be digging a bigger financial hole if the extra spending outstrips the tax savings he's getting from the state.

Clearly, consumers love saving and bargains, but they shouldn't be ruining their financial plans to capture a deal.

"Sales create a feeling that you have to buy now to get some great deal," says Gerri Detweiler, author of "The Ultimate Credit Handbook." "You want to take advantage of the deal, but you have to make sure the bargain doesn't take advantage of you."

Chuck Jaffe is a senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.

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