Posted by Andrew Liebowitz, September 30, 2010

Thanks to the New York State budget adopted in July, clothing and footwear will get pricier for retail shoppers in New York starting tomorrow October 1. That’s when the 4.0 percent New York State sales tax and 0.375 percent Metropolitan Transportation Authority-dedicated sales tax on clothing under $110 return. From then on, anyone buying a coat that costs $109 will have to shell out $113.77. Or at least they will for a number of months. With the exemption on sales tax for clothing and shoes under $110 scheduled to return in phases over the next 16 months, a calendar may prove to be a helpful shopping tool.

In the first phase, the state sales tax and the portion of the sales tax dedicated to the MTA will be temporarily reinstated for clothing under $110 from October 1, 2010 through March 31, 2011. In the second phase, which runs from April 1, 2011 through March 31, 2012, clothing under $55 will be exempt from state and transit sales tax. And in the third phase, beginning April 1, 2012, clothing under $110 will once again be free of sales tax. MTA funding will not be affected during any phase of the legislation; when the sales tax earmarked for transit is suspended, the state and city each put up half the money to compensate the MTA for any revenue foregone.

The city has the option of following the state’s lead and temporarily repealing its own sales tax exemption for clothing under $110. If it did, clothing shoppers would pay sales tax totaling 8.875 percent: 4.5 percent for the city, 4.0 percent for the state, and 0.375 percent for the MTA. Repeal of the city’s exemption would require action by the Mayor and City Council.

The Mayor’s Office of Management and Budget estimates that the current sales tax exemption on clothing under $110 costs the city over $300 million annually. While repeal of the city’s exemption would provide a significant amount of revenue at a time when the Mayor is again proposing cuts to the city budget, opponents of restoring the tax argue that it would hurt local clothing merchants competing with jurisdictions that don’t tax clothing sales. They also point out that sales taxes on clothing are generally regressive, falling more heavily on those who can least afford it.

After taking into account clothing sales lost to other states with lower taxes, the New York State Division of the Budget estimates that taxing all clothing sales will increase the state’s sales tax receipts by $330 million for state fiscal year 2010-2011. With the sales tax exemption for clothing under $55 scheduled to be restored on April 1, 2011, the Division of the Budget expects a somewhat smaller revenue increase of $210 million for 2011-2012.

Implementation of the sales tax changes take on added complications with mail order and online sales, rain checks, layaway sales, and exchanges. The New York State Department of Taxation and Finance offers a guide that explains when the clothing tax should be applied to these types of sales.