Old idea, new vigor: talk resurfaces of expanding sales tax to services.
In the waning days of Gov. Schwarzenegger's administration, an old idea resurfaced with new vigor. As a means of leveling out California's revenue stream read, taxes--the governor started talking about expanding sales tax to more services, including accounting and legal.
Blue Ribbon Commission
In response to that, the Revenue and Taxation Committees of the Assembly and Senate held informational hearings Sept. 1 on the concept. The committee did not consider any specific proposal because none had been developed by the administration, but testimony was taken from Gerald Parsky, chair of the governor's Blue Ribbon Commission on the 21st Century Economy.
Parsky explained that his commission had the charge of developing a tax structure that fits the state's 21st century economy It's goals were: to stabilize state revenues and reduce volatility; promote the long-term economic prosperity of the state and its citizens; improve California's ability to successfully compete with other states and nations for jobs and investments; reflect principles of sound tax policy, including simplicity, competitiveness, efficiency, predictability, stability ease of compliance and administration; and ensure that the tax structure is fair and equitable.
The commission concluded that California's progressive personal income tax is far more volatile than the sales lax. The commission had concluded that the tax base was too narrow and the tax rates were too high. For each of the revenue sources personal income lax, sales lax and corporate income tax California has one of the highest rates in the country, which harms its competitiveness with other states and nations.
Tax System Overhaul?
The commission recommended that California eliminate the corporate income lax and reduce the personal income tax top rate from 9.5 percent to 6.5 percent, and that the stale sales tax be replaced with a new Business Net Revenue Tax.
In previous hearings on the commission's findings legislators were skeptical about a BNRT tax since it was unproven. No action was taken to forward the commission's findings into legislative proposals.
Parsky stressed that instituting a broad sales tax on services, coupled with dropping the other tax rates, could accomplish the same goal of reducing volatility He indicated that the service tax should have very limited exclusions for services such as those predominately provide by government or where the federal law restricts the ability of states to tax.
He also indicated that the commission had supported an exemption for small businesses, which he defined as a business with gross receipts less than $500,000.
While Parksy supported lowering of other taxes, there was significant support for retaining the level of other taxes and adding the service tax to enhance California's revenue picture.
Margaret Shedd, legislative counsel for the Board of Equalization, testified that requiring a broad based sales tax on services could triple the number of people needing to get permits and register with the BOE. She also pointed out the difficulties of deciding at what point the tax was should be paid.
Her estimate was that there would be difficulty in determining what amount would be due to California when services are rendered to an national entity with some California presence. Her conclusion was that some services would be double taxed and others would be untaxed. She pointed out the difficulty that the BOE was having in collecting use tax, and made the point that it would be even more difficult to collect a service tax where the service might not even be provided in this state.
Down, but Not Out
After hours of discussion and questions the general consensus was that, in the absence of an actual proposal, it was futile to give more time to the concept of expanding sales tax at this point and expanding the lax base would not solve the state's immediate fiscal crises.
That docs not mean that the battle is over, however.
Immediately after the prepared testimony was concluded, at least 20 groups testified that if a service tax was instituted, it should not apply to the service that they represented. Veterinarians wanted an exemption, as did amusement parks, travel industry representatives and others. Those representing small and large businesses did not want the legal and accounting services taxed.
Sales tax on services will be a topic of discussion and will likely be the subject of legislation at some point in the next legislative session. CalCPA's position has been that if a sales tax on services is implemented, then it needs to be applied fairly so as not to disadvantage one competitor over another. Individuals providing the same or similar services should be taxed equally.
Also, requiring millions of businesses to register with the BOE to collect and pay-sales tax will result in significant increases in administrative costs to the state in processing the registrations and payments, educating the new collectors of sales tax and in audit and collection fees.
Bruce C.Allen is CalCPA's director of government relations. Jeannie Tindel is CalCPA's director of legislation.