Service Tax
California CPA magazine: June 2008
It’s Back: California’s Budget Woes May Trigger Sales Tax on Services
by Bruce C. Allen
A Los Angeles Times article in early May reported that Gov. Schwarzenegger’s administration was holding private meetings with stakeholders to prepare them for
a tax increase—including potential expansion of sales tax to accounting and legal services.
Following the article, the governor’s office released a press advisory saying that the Los Angeles Times story was inaccurate and that no private meetings had been held with stakeholders to prepare for a tax increase.
The advisory went on to say that the governor’s staff had met with various groups to discuss the budget deficit and that all ideas were on the table, but the administration felt that California could not tax its way out of systemic budget problems.
With a deficit approaching $20 billion, it is apparent that something must be done to resolve the state’s fiscal crisis.
The following week, other papers reported that new Assembly Speaker Karen Bass was looking at tax reforms that would address California’s budget issues and that taxing services—such as accounting and legal services—might be an option.
Prior to making any sudden moves toward that end, however, Bass called for the formation of a blue ribbon advisory panel to review California’s tax structure and find the best way to resolve the issues.
CalCPA’s Take: Tax is Burdensome, Businesses May Flee State
CalCPA successfully opposed a 2005 attempt to impose a tax on accounting and other services. A sales tax on services, including those provided by CPAs, would be unnecessarily burdensome on small businesses, tax consumers for filing taxes and prompt businesses to move to states that do not tax services.
“CalCPA opposes any effort to impose a tax on services,” says CalCPA Chair Teresa Mason. “Consumers in California already pay among the nation’s highest sales taxes on products. A sales tax on services is an extra burden on consumers as well as on businesses.
“Businesses that pay sales taxes on services they use will have to raise the prices of products they sell consumers to compensate,” Mason continued. “And if accounting services are taxed, people and small businesses will be paying a tax for having CPAs and tax preparation services prepare their federal and state returns. That’s essentially a tax on taxes.”
Mason said that a tax on services would likely result in businesses leaving California for states that do not impose similar taxes.
“If the goal is to find additional sources of revenue, how will that happen if businesses—as well as their employees—flee the state? Fewer businesses and fewer employees mean state income tax revenue will drop. Taxing services is unlikely to replace such lost revenue, let alone increase tax revenues overall,” she said.
Mason also commented that a sales tax would complicate administrative record keeping on the part of small businesses not used to collecting taxes from clients. Such administrative costs would then be passed on to clients and consumers, further increasing the cost of services.
“Taxing services is a bad idea for the state of California,” Mason said. “It will harm California’s overall business climate.
In the end, savvy businesses and consumers will move to other states with less egregious tax laws.”
Florida became the first state in decades to extend broad-based sales and use tax on services. Although the tax was repealed after six months, other states have aggressively pursued similar legislation.
Similarly, a sales tax on consulting services in Iowa was signed into law in April 1993, and was repealed one month later.
There are five states that now impose some form of tax on accounting services: Delaware, Hawaii, Nevada, New Mexico and South Dakota.
Since California’s budget is supposed to be passed by this month, something will be done quickly.
CalCPA will be actively participating in efforts to avoid a sales tax on accounting services and may call on members and their clients to respond as proposals are forwarded.
CPA Day
CalCPA held another successful CPA Day at the Capitol in Sacramento May 13, as almost 300 CPAs attended and met with 100 legislators and their staffs to discuss consumer protection and taxpayer choice issues related to mobility and the detrimental impacts of a sales tax on accounting services.
This one-day event is a simple and successful way to introduce legislators to the CPA profession and promote business issues.
Thank you to those of you who participated.
Bruce C. Allen is CalCPA’s division director of government relations.
