A local official and witnesses said thousands took part in the demonstration on Tuesday against the 5% tax on luxury goods that has been under debate since 2002, causing disputes between the government and shopkeepers.
The police used tear-gas and fired warning shots when the demonstrators tried to approach the governor's offices, witnesses said.
About a dozen demonstrators were arrested.
A local official confirmed the protest was broken up by police and that most shops in the Red Sea port city had observed a strike. Several shops also stayed closed in Sanaa.
Customs chief Numan al-Shihabi said the tax, expected to finally come into effect in mid-2005, would not apply to a list of 40 products such as foodstuffs and sanitary and educational supplies.
Meanwhile, 3000 Yemeni students staged a sit-in for several hours on Tuesday at Sanaa University to protest against what they called a vicious attack on public freedoms in the country.
The protesters expressed solidarity with a teachers' union strike by Yemeni university employees demanding higher salaries.