As states face financial difficulty, they are increasingly looking to sales and use taxes on professional services as a means of increasing state revenues.
In 1987, Florida became the first state in decades to extend a broad-based sales and use tax on services. Although the tax was repealed after six months, other states have aggressively pursued similar legislation. Similarly, a sales tax on consulting services in Iowa was signed into law in April of 1992, and was repealed one month later. The need to maintain an adequate revenue flow and at the same time improve public services has resulted in many state legislatures adding taxes in a piecemeal fashion, without a comprehensive review of the entire tax structure. As state governments face a projected decline in revenues in the late 2000s, the issue is expected to re-emerge.
Importance to CPAs
There are several reasons why sales and use taxes are not only a bad idea for CPAs, but for all services.
- Discrimination against small and emerging businesses. Small firms are forced to use outside services. The compliance costs can be very high. Most importantly, siphoning monies into additional taxes limits the growth of small companies.
- Pyramiding taxes on services and final goods. Under this kind of system, the potential for goods and services being taxed several times exists and this results in higher consumer costs.
- States with service taxes are at a competitive disadvantage compared to states that do not tax services. Not only does it discourage the use of services, but it also discourages companies seeking to relocate or expand.
The AICPA works with state CPA societies to oppose the imposition of a sales tax on services. The AICPA does recognize that revenue raising to support government programs is an ongoing process that constantly requires reassessment of current taxing structures. Because of the administrative and technical difficulties associated with the enactment of a service tax, we believe states should seek other alternatives.
The AICPA’s Tax Team can provide a document that states can use that addresses key points to consider when discussing this issue with state legislators.
Currently, there are five states that impose some form of tax on accounting services. These states are Delaware, Hawaii, Nevada, New Mexico and South Dakota. There has been activity on the state legislative and judicial levels to redefine some traditional services as products, thus making them available to a sales tax. As states face declining tax revenue collections, several state legislatures have moved to consider proposals that may include taxes on accounting services. In 2009, these proposals were defeated in Connecticut and Minnesota, and in the 2007 legislative session, a proposal to implement a tax on some CPA services was vetoed by the Governor in Michigan.
AICPA monitors this issue on a nationwide basis. In addition, the AICPA's advocacy document; Sales and Use Tax on Services: Arguments Opposing Implementation of Such a Tax is available for use by state societies.
AICPA Staff Contacts
Ed Karl, Tax Division, 202.434.4228