CPA Day

February 21, 2018

Meetings with Legislators Kick Off the Year

By Jason Fox

January marked another successful CPA Day at the Capitol. More than 200 CalCPA members participated in more than 100 meetings with legislators and staff to show that the CPA profession is willing to participate in public policy discussions. 

CalCPA member commitment to these advocacy efforts are a big reason why CalCPA and the CPA profession is well respected within the Legislature. We are thankful for our passionate members who are committed to the success of their profession. 

The materials used during CPA Day can be found online. The main topics this year included working with the CPA profession for practical policies to manage the impact of new federal tax policies and the ongoing concerns of a potential sales tax on services.
 
Navigating the New Federal Tax Policy
With new federal tax laws a reality, state legislatures are trying to manage the impact on their own economies and budgets. California is no exception, and being a high-tax state, there are some unique challenges.

One such effort is SB 227 (Sen. President Pro Temp Kevin de Leon), which attempts to counteract the cap on state and local tax deductions. The bill would allow taxpayers to make charitable contributions to the state in exchange for a tax credit equal to 85 percent of the contribution. The idea is that taxpayers would be able to reduce their state income tax liability and take advantage of federal charitable tax deductions.

Proposals like this contain many unknowns, logistical challenges and raise questions that would need to be addressed before any tax practitioner could consider this option. And it’s unclear whether the IRS would even accept this type of deduction.

As such, CalCPA members advocated for workable tax policies and offered to work collaboratively to manage the impact of the new tax laws. Members explained that the full impact of federal tax reform on California taxpayers is yet to be determined. 

Based on the size, complexity and a multitude of external factors, it may take years to fully understand the impact of the federal changes. Even then, the impact could be drastically different depending on each taxpayer’s situation.

Before undertaking drastic changes that may not be fully developed, California will first need to understand how the new laws will work and make decisions to conform to, or decouple from, aspects of the federal changes. This process takes time and requires policy decisions that will impact taxpayer liabilities and decisions. A measured approach will be best for long-term success and avoid errors that might arise from a overreaction. 

CalCPA is committed to continuing conversations with the Legislature to work through these issues and local CPAs can be a resource to provide insight into how constituents will be impacted

Tax on Business Services 
Tax on services has simmered among legislators for years, including the periodic introduction of legislative proposals. Despite constant rumblings, no proposal has included details regarding how such a complex and drastic shift in the tax burden would work or has been able to garner support to move through the legislative process. 

In anticipation of the issue re-emerging in the Legislature, CalCPA members reiterated the profession’s strong concerns over a sales tax on services during their CPA Day meetings with legislators. 

Within days of CPA Day, Sen. Hertzberg introduced SB 993, which proposes a new sales tax on services and, unlike past proposals, would impose a sales tax on the purchase of business services. 

The proposal exempts some services (health care, education, child care, and interest and insurance payments) and small businesses with gross receipts less than $100,000, but would tax other services a business might purchase—including accounting, legal, tax and consulting. Similar to past proposals the legislation lacks specifics, has significant ambiguities and raises many questions. Yet, it is being characterized as a way to mitigate perceived negative impacts of the newly enacted federal tax laws and broaden California’s tax base. 

The bill’s author argues that the proposal would offset the reduced tax rates businesses received as a result of the federal tax changes, and that they would still be able to deduct the new services tax from their federal taxes. 

The tax revenue would go toward programs for middle- and low-income Californians who might be impacted by changes in federal programs, though the specifics of these programs or how they would accomplish this is unclear. 

There are a various issues related to a tax on services, including small and medium size businesses that can’t bring services in house will be disproportionately impacted. Also, California providers will be at a competitive disadvantage compared to out of state providers. Many services, such as tax and audit compliance, are required to meet various legal requirements. Not to mention the significant administrative challenges for tax regulators and business that will need to develop systems to track and collect the new taxes. 

Most notably, it would be unwise to implement a complex new tax to offset unknown changes to federal programs or without fully knowing how the new tax laws will impact California taxpayers, particularly service providers and business owners who will be subject to the new service tax. 

The efforts of CalCPA members will be instrumental in communicating these issues with the Legislature.
Jason Fox is CalCPA’s director of legislation.
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