Professional services tax proposals discussed in multiple states

Proposed legislation in several places sought to tax accounting services but was opposed by the AICPA and others.
By George Spencer

Taxation of CPA services was a hot topic in several state legislatures this year as states sought to fix expected revenue shortfalls.

“Some states will be dealing with some sort of budget difficulties going into 2021 and 2022,” said Megan Kueck, lead manager–State Regulation & Legislation at the AICPA. “They are looking at expanding their tax base, and that expansion of the tax base may include taxes on professional services.”

States have debated for years whether to broaden their sales tax base to include professional services, typically those offered by CPAs, attorneys, real estate agents, and architects. In recent years, legislatures have become more creative in their consideration of these taxes, according to Kueck, as increased state budget deficits have put more pressure on legislators to find ways to fund transportation needs, education, and other social services.

Pandemic’s effect on state tax revenue

As many states’ economic woes worsen because of the combined effects of the pandemic and economic shutdowns, “we expect interest [in this legislation] to increase considerably,” said Joe Crosby, CEO of MultiState Associates of Alexandria, Va., which tracks legislative activity in statehouses around the nation. Besides tracking legislation, his company runs advocacy campaigns and testifies before state legislative committees on behalf of its clients, which are corporations and professional organizations, including the AICPA.

A “high probability” exists that bills to tax professional services will be introduced this year in California, Connecticut, Illinois, Kansas, Maryland, Pennsylvania, Rhode Island, Virginia, and Washington, according to MultiState’s analysis.

Colorado, Minnesota, Nebraska, Oklahoma, Texas, Vermont, and Wyoming may have a “willingness” to consider such legislation, according to MultiState.

In West Virginia, Gov. Jim Justice proposed professional services taxation legislation in exchange for cutting the state’s income tax in his State of the State address in February.

The measure failed but had proposed a tax on professional services somewhere in the ballpark of 6%, the same as the state’s sales tax, according to Kueck. She said proposed professional services taxes are generally the same rate as a state’s sales tax.

She credited state CPA societies’ efforts at the local level for stopping many such bills in the past. “Their tenacity has been invaluable for the profession. We work with them, but they have the ground game covered.”

Professional services targets for taxes

Legislative interest in taxing professional services has a long history. The issue drew national attention in 1987 when Florida passed a broad sales tax on services that was soon repealed thanks to opposition by in-state businesses. In 2007, Michigan enacted and then repealed a broad sales tax on services

In 2019, Utah lawmakers fast-tracked legislation that would have taxed professional services.

“There was a ton of outcry there,” Kueck said. “Hundreds and hundreds of letters were sent to state legislators.”

Similar bills also failed that year in Connecticut and Wyoming. In 2020, Maryland introduced a bill to expand taxes on professional services, but its state CPA society successfully worked to shelve that legislation.

“The accounting profession and other affected professions are going to work diligently to make sure that legislators will understand the deleterious impacts of adopting this sort of legislation,” Crosby said.

Bipartisan interest in professional services taxes

Interest in taxing professional services, he said, comes from both sides of the aisle and for different reasons.

“Conservative state lawmakers believe the best thing they can do for citizens is allow businesses to provide a higher standard of living, and the best way they can do that is to reduce taxes on production,” he said. “More progressive elements believe the best way to enhance citizens’ well-being is provide more and better government services, and you have to raise taxes to do that.”

These proposals fail because they are poorly crafted from a tax or economic policy perspective, according to Crosby, who pointed to data from the Commerce Department’s Bureau of Economic Analysis (BEA). Eighty-one percent of accounting services (including bookkeeping and tax preparation) are provided to businesses, according to the BEA. Government and not-for-profit purchases constitute 10% of accounting services. The remaining 9% are purchased by individuals, and nearly all of those services are for tax preparation.

“Even if you wanted to impose a tax on that minor remainder — tax preparation services for individuals — that’s perverse,” Crosby said. “You are telling people you will impose a tax on them only because they are forced to comply with tax laws.”

George Spencer is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.

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