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State sales tax on professional services.

State Sales Tax on Professional Services

To meet budgetary deficits exacerbated by declining income tax and sales tax receipts due to the recession, many states are considering an expansion of their sales tax bases to include a sales tax on services. Since the American economy is moving from an industrial "smokestack" economy to a service-oriented economy, it was just a matter of time before state legislatures turned to a sales tax on services to make up for the declining sales tax base on the sales of tangible goods.

A sales tax on the service sector includes a tax on the services performed by professionals such as doctors, dentists, engineers, architects, lawyers and, of course, accountants, whether licensed or not.

It is acknowledged that a sales tax on professional services, especially those of doctors, attorneys and accountants, is highly regressive and falls most heavily on the consumers of those services who are least able to pay. Thus, the low income person least able to pay for medical services finds the costs increased since the sales tax is passed on to the consumer.

Similarly, the small business entity that might be struggling to remain solvent will find its costs increased significantly when it must pay a sales tax on the professional services it receives. Small business contract for numerous services that they are unable to provide for themselves. These include not only legal and accounting services, but computer, custodial and security services. For most small businesses, a sales tax on professional (and related) services will tend to increase significantly the cost of doing business without corresponding offsetting benefits.

Additionally, the burden on the small business that provides the services subject to the sales tax should not be overlooked. Small firms that provide services have a higher cost of compliance than that incurred by the large firms because the larger firms are able to employ more workers and equipment to enable the firm to keep compliance costs to a minimum. Furthermore, small firms who must add an extra charge for the sales tax on services may find that their clients may seek to avoid the extra costs by hiring employees to do the work inhouse.

In response to a proposal in the Wisconsin legislature that would expand the sales tax to a selected list of business and professional services, NSPA's affiliate, the Wisconsin Association of Accountants (WAA), included a special insert in its newsletter to WAA members opposing expansion of the Wisconsin sales tax to professional services. The Wisconsin affiliate listed nine reasons for its opposition.

The WAA argues (correctly, we believe) that a sales tax on professional and other business services impedes business expansion by increasing the front-end development costs of doing business, involving accounting, architecture, engineering, legal and financial services. In this respect, expanding the sales tax to professional services is the same as a tax on capital investment or business expansion.

The WAA also argues that the expanded sales tax on professional services may place the Wisconsin professional firm at a competitive disadvantage with respect to out-of-state firms. While it is not clear from the proposed Wisconsin legislation whether a Wisconsin professional firm would be liable for the Wisconsin tax on services performed outside the state or whether an out-of-state firm providing services in Wisconsin would be subject to the tax, such tax compliance questions need to be clarified to avoid enforcement and compliance problems.

According to WAA, only the states of Delaware, Hawaii, New Mexico and South Dakota impose a sales tax on accounting services. Massachusetts repealed its sales tax on professional services because of intense public opposition. Florida's sales tax on services was also repealed because of its unpopularity and its significant administrative problems.

Traditionally states have included services such as restaurant meals, transient lodgings and public utility services in their sales tax base, but until recent years no state seriously suggested a sales tax on personal and professional services.

State legislative efforts to impose a sales tax on professional services open a window of opportunity for the NSPA affiliated state organization. The unlicensed independent practicing accountant and the state CPA society find themselves on the same side of an issue. While the small business clients of the unlicensed accountant are affected more by a sales tax on professional services than the clients of large CPA firms (because small businesses are unable to provide many in-house services and must rely on outside contractors for those services), the large businesses can and do provide most of their services in-house. Nevertheless, the large CPA firm finds the sales tax on its professional services just as onerous with its reporting and payment functions and hence is as opposed to the tax as the unlicensed accountant should be.

NSPA affiliates possess considerable political clout on the state level. Accordingly, the opportunity is available for the ASO to display its political muscle on the same side of an issue with the CPA state society and the other professional organizations that oppose a sales tax on professional services. A coalition of professional societies who have similar concerns is a distinct political advantage for the ASO. The day will certainly arrive when the ASO can seek reciprocation from its allies in the political fight to defeat the sales tax on professional services.
COPYRIGHT 1991 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Washington Comment
Author:Sager, William H.
Publication:The National Public Accountant
Article Type:column
Date:Sep 1, 1991
Words:877
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