Issue Brief
Sales Tax on Professional Services
Issue
Talking Points
States are increasingly looking to sales and use taxes on professional services as a
means of increasing revenues. Currently, Pennsylvania is looking at a $2.3 billion
structural budget deficit, and Gov. Tom Wolf’s budget seeks to increase education funding while providing property tax relief. The combination would require
lawmakers to find additional revenue. As such, a sales tax on professional services
continues to be part of the conversation. Significantly expanding the sales and
use tax base will alter the nature of the sales tax. Lawmakers should be aware of
the tax policy issues involved and the unintended consequences of such a shift as
the one proposed.
• The vast majority of states do not tax
services, and three states that passed
such proposals repealed them due to
the complexity in administration.
PICPA Position
The PICPA strongly opposes legislation that would impose a sales and use tax on
accounting, auditing, tax, and related professional services because it would have
a direct negative impact on Pennsylvania taxpayers.
Discussion and Explanation
The issue of expanding sales and use taxes to include professional services usually
becomes active during periods of low tax revenue as states seek to broaden the
number of those who are taxed. The past several years have seen dozens of states
consider taxes on professional service, and the expectation is that the trend will
remain steady.
Currently, only three states tax all professional services through a gross receipts
tax: Hawaii (4 percent), New Mexico (5 percent), and South Dakota (4 percent).
Some states also have taxes that affect, but do not specifically target, the accounting profession. For example, Delaware imposes a gross receipts tax of .004
percent on monthly receipts over $100,000, and the state of Washington has a 1.8
percent business and occupation tax on service providers.
Four states have enacted a sales tax of professional services in the past—Florida,
Massachusetts, Michigan, and Maryland. All four states quickly repealed their
laws before or shortly after they went into effect because of concerns of an unfair
impact on in-state providers versus out-of-state providers. Additionally, lawmakers found that it was difficult to source the service, let alone determine when and
how the services were being delivered.
Although many states tax some services, there is no strong trend of state laws
expanding the sales tax base to include professional services. Even at the height
of the recent recession, most states looking at a sales tax on professional service
rejected the idea as inherently unworkable. In 2013, 15 states saw 40 bills
containing tax on service language introduced in their respective legislatures
only one passed and it was repealed before enactment. In 2014 five bills were
introduced in five states. None of these bills were signed into law.
Continued on reverse
• Only Hawaii, New Mexico, and South
Dakota currently impose a broad-base
sales tax on services.
• Administration of the sales tax would
become complicated, as it is unclear
where, when, and how a service is being
provided.
• Taxing personal income tax services is an
unfair taxation on the services necessary
to comply with tax law. Both individuals
and businesses depend on accounting services to comply with federal and
state tax laws – taxing compliance with
these laws compounds the tax burden
borne by individuals and businesses. It
also discourages individuals from using
professional advisors, thus resulting in
poorer accuracy of returns and lower
state revenues due to higher enforcement costs.
• The increased complexity of the tax
would require the use of accounting
services resulting in a tax on a tax.
Legislative History
Last session, Senate Bill 76 and House
Bill 76 were introduced but were never
brought up for votes on the floor of their
respective chambers. These proposals
increase the sales and use tax while also
expanding the base.
Gov. Wolf has introduced legislative
language reflecting his executive budget.
This proposal would increase the sales and
use tax rate while also expanding the base.
This language has not been introduced
as a bill in the House, but the language
has been introduced as amendments to
several bills that are before the House for
consideration.
More recently, Senator Vincent Hughes
(D-Philadelphia), Democratic Chairman
of the Senate Appropriations Committee,
introduced Senate Bill 117. This bill
follows the Governor’s proposal by
expanding the sales and use tax to
include professional services while also
increasing the rate to 6.6%.
Sales Tax on Professional Services
Significantly reordering a state’s tax and revenue systems is a major undertaking
that can have dramatic implications – especially if done precipitously, quickly, or
rashly. If the state’s effort to shift to a services tax was only partly successful – and
estimates were wrong and significant revenue was not collected – the state would
have to make up potentially hundreds of millions of lost revenue within the same
fiscal year. This would disrupt many major programs, and harm the state’s reputation with, and ability to court, businesses.
The expansion of the base of taxable services would also create a competitive
disadvantage for states seeking to enact such proposals. Given the disparity of
states that currently tax services versus those that do not, Pennsylvania would
be discouraging relocation and expansion of businesses in the Commonwealth.
None of the states that are contiguous to Pennsylvania currently tax services, and
by enacting a sales tax on services, lawmakers will negatively affect economic
development and discourage the use of professional services.
Lastly, a tax on accounting, tax preparation, and related professional services –
even one that exempts business-to-business transactions – is an unfair taxation
on the services necessary to comply with state tax laws. Individuals depend on
accounting services to comply with both state and federal tax laws. To tax compliance with these laws compounds the tax burden borne by individuals. This could
lead to many preparing their own returns, a “do-it-yourself” approach that can
lead to costly mistakes and noncompliance. Without professional guidance on
tax matters, the potential for lower accuracy and revenues will lead to a higher
cost of compliance borne by the state. Note, too, that this could be perceived as
double taxation by many consumers.
About Us:
The Pennsylvania Institute of
Certified Public Accountants (PICPA)
is a professional association of more
than 22,000 members working
together to improve the accounting profession and better serve the
public interest. Founded in 1897,
the PICPA is the second-oldest CPA
organization in the United States.
Membership includes practitioners
in public accounting, industry,
government, and education.
Contact us:
Headquarters
Ten Penn Center
1801 Market St., Ste. 2400
Philadelphia, PA 19103
(215) 496-9272
Government Relations
500 N. 3rd St., Ste. 600A
Harrisburg, PA 17101
(717) 232-1821
[email protected]
Western Regional Office
One Oxford Center
301 Grant St., Ste. 4300
Pittsburgh, PA 15219
(412) 255-3761
For more information, contact your CPA or PICPA at [email protected].
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