Michigan proposal to tax legal services draws fire.

As part of a solution to a state budget shortfall of more than $800 million, Michigan Gov. Jennifer Granholm (D) has proposed a 2 percent sales tax on a variety of services, including legal services. The governor's proposal faced immediate criticism from both Democrats and Republicans. The state bar association opposes the tax, asserting that it will impede the public's access to justice.

Only Hawaii, New Mexico, and South Dakota currently tax legal services. Hawaii and South Dakota include them in a general sales tax scheme; New Mexico's 5 percent "gross receipts tax" is applied to legal services. (See Haw. Rev. Stat. [subsection]237-7 to -13 (1988); S.D. Codified Laws Ann. [subsection]10-45-1 to -5.2 (1989); N.M. Stat. Ann. [subsection]7-9-1 to -4 (Michie 1978).)

Opponents to Granholm's proposal argue that it would amount to a "misery tax" levied on people at times of misfortune and vulnerability. They say clients who seek legal assistance in cases involving divorce, death, domestic abuse, end-of-life decisions, or bankruptcy seek them out of necessity, not choice.

Opponents also assert that:

* A sales tax on legal services will be especially harmful to individuals and small businesses. Larger organizations could avoid the tax by hiring in-house counsel, with salaries not subject to the tax.

* Collection of a sales tax on legal services might intrude on the attorney-client relationship, potentially creating conflict between lawyer and client and violating client confidentiality. For example, the state Department of Revenue would need access to records that an attorney is required to keep confidential.

* The tax would create an administrative nightmare. Determining what fees and services would be subject to the tax and which records would be subject to an audit would add to the complexity.

Furthermore, attorneys often don't receive payment promptly from their clients, making it a potential administrative burden to reconcile payment and tax issues.

* The tax could prompt clients to seek legal services outside Michigan. Services related to intellectual property, federal taxes, estate planning, or business matters could be obtained easily from out-of-state attorneys.

* The tax could also drive lawyers out of Michigan. Law firms might decide to relocate to other states or perform services at satellite offices elsewhere.

Two states, Florida and Massachusetts, enacted sales taxes on services but repealed the measures when they proved to be unpopular and difficult to administer. Several other states, including Maine, Maryland, Ohio, and Vermont, as well as the District of Columbia, rejected similar proposals. Michigan lawmakers had previously declined to pass such a measure.