State Tax Advocacy Issues

This page provides information and documents on state-level advocacy issues affecting tax professionals.

Regulation of Tax Preparers

Regulation of tax preparers continues to be a growing issue of concern by policymakers at both the federal and state level. This issue is likely to continue to receive attention in the 2020 state legislative sessions. The National Consumer Law Center released model state-level language in 2014.
 
The AICPA does not support additional state regulations of tax preparers, and the AICPA has resources available for state societies that face such measures. For more information, contact James Cox, Associate Director, AICPA State Regulatory & Legislative Affairs, at James.Cox@aicpa-cima.com.

State Tax Tribunals

States continue looking at the adoption of tax tribunals as a means of resolving state tax appeal controversies prior to litigation and in a forum outside the dominion and control of the state tax authority.

Background

Thirty-five states currently have tax tribunals located in either the executive or judicial branches of government. In 2109, three bills (AR – (S.B. 560), HI - (H.B. 1043), NM – (S.B. 129)) were introduced relating to state tax tribunals.

In 2018, AZ – (SB 1385) and MI – (H.B. 4412) enacted legislation relating to state tax tribunals, and MT – (S.B. 137) and WA – (H.B. 2777) had proposed legislation relating to state tax tribunals. 

Details regarding the bills are included in the AICPA Chart of States with and without State Tax Tribunals. Several legislatures are expected to consider tax tribunal legislation in 2020, as well.

The 2006 American Bar Association (ABA) Model State Administrative Tax Tribunal Act (Model Act) provides legislative language that often serves as a base for legislation on this issue. As more states consider establishing independent tax appeal forums or revising existing tax appeal systems, it is important to review the proposals to ensure CPAs authorized to practice in the state are able to represent taxpayers before the tribunal.

In addition to the rights of CPAs to represent clients before proposed tax tribunals, it is also important to
consider whether tax laws promote fairness and efficiency in regard to tax administration and policy. Issues of concern relate to:

  • independence from the State Revenue Commissioner/Department of Revenue;
  • Avoiding “pay-to-play” (the ability to challenge an assessment without first paying the tax, interest, and penalties);
  • Limited jurisdiction/specialized tax expertise;
  • Experienced tax judges; and
  • Published precedential decisions.

The specific details of the forums vary among the states, therefore, as states consider this issue, it is important for CPAs to advocate for fairness and mobility in representation rights before the tribunals. This issue is expected to continue to be debated around the country over the next several years.

Importance to CPAs

There are several reasons why state tax tribunals are a good idea for taxpayers and CPAs, as well as for the broader goal of good tax administration. Tax tribunals ensure a fair and effective tax administration system for taxpayers. All taxpayers would have a state tax appeal forum for state tax disputes that functions independently from the state tax authority. Additionally, tax tribunals – when structured in line with the ABA Model Act and state CPA mobility laws – provide CPAs with greater taxpayer representation rights and service opportunities.

AICPA Position

While the AICPA does not lobby directly at the state level, it supports efforts by state CPA societies who may advocate for the creation of state tax tribunals structured in line with the provisions of the ABA Model Act. The AICPA believes that if a state is considering possible legislation on this issue, “Section 16. Representation” of the ABA Model Act should be slightly revised to take into account state CPA mobility laws.

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Sales Tax on Professional Services

Several state legislatures continue to consider expanding sales tax to services, including professional services such as accounting. The AICPA assists state CPA societies with advocating against a state sales tax on accounting services.

Background
States typically impose sales and use taxes on the sale of tangible personal property and selected services, with a few states broadly taxing all types of services, including accounting services. In the past quarter-century, due in part to stagnant sales and use tax revenue as compared to rising expenditures, numerous states have attempted but failed to broaden the sales tax base to include professional services. 

Importance to CPAs
Because of the difficulty surrounding the taxation of professional services, there are several reasons why the imposition of sales and use taxes on accounting services should not be considered by state legislatures:

  1. Discrimination against the small and emerging businesses that CPAs represent. Small businesses often are forced to use outside vendors to perform audit, tax and business advisory services. The compliance costs for these items can be substantial and taxing these services will further increase financial pressure on these businesses, essentially limiting the growth of small businesses.
  2. Pyramiding taxes on services and final goods. Under a system that taxes accounting services, the potential for goods and services being taxed several times exists as a result of difficult sourcing issues, resulting in higher consumer costs. If tax compliance services are taxed, individuals and businesses will effectively pay a tax for paying taxes.
  3. Lack of uniformity between the states. Given the historical state tax landscape, not all states will choose to tax accounting services in a uniform manner, and not all states will define the term “accounting services” similarly, leading to unwanted variability from state to state. States that decide to tax accounting services are at a competitive disadvantage compared to states that do not tax services, especially in an economy where physical location is of decreasing importance. Not only does it discourage the use of services, but it also discourages companies seeking to relocate or expand into these jurisdictions.

AICPA Position
Because of the reasons listed above, the AICPA works with state CPA societies on a state-by-state basis to oppose the imposition of a sales tax on accounting services. The AICPA recognizes that raising revenue to support government programs is an ongoing process that constantly requires the reassessment of current taxing structures. However, as states continue to consider the taxation of additional services, legislatures must understand that some services are more easily subject to a sales tax than others. For example, for services that are performed and received at the same location (e.g., salon services, cleaning services, etc.), the taxing jurisdiction is clearly evident, reducing the complexities around the taxation of such services. It is also easier to administer a sales tax for services that already collect a tax on the sale of tangible personal property (e.g., car repair). However, professional services can be performed in multiple locations and received in completely different locations, creating a difficult dichotomy for tax compliance. Because of the administrative and technical difficulties associated with the enactment of a service tax on accounting services, the AICPA believes states should seek other alternatives.

State Action
Currently, three states impose some form of tax on accounting services: Hawaii (four percent), New Mexico (five percent) and South Dakota (four percent). In addition to the traditional accounting services, accounting firms may also provide services that could be construed to be “data processing services,” “information services,” and “management services,” which are taxable in several states. Furthermore, in some cases, state legislatures and courts have acted to redefine traditionally non-taxable services as products subject to the sales tax. 

Proposals to adopt sales taxes on professional services continue to be introduced across the country, with eight legislatures considering related legislation in 2019.  However, proposals were defeated in Connecticut, Utah and Wyoming, with CPAs taking a leadership role in these states.  Legislatures in California, Montana, Nebraska, Texas and Florida have active tax on services legislation, and the Maryland legislature is considering a study bill on the issue. The idea to tax services is not a new one.  Minnesota, Massachusetts, Michigan and Florida all tried to impose sales taxes on services in the past, but their efforts were quickly repealed.

States’ attempts in this area are likely to continue for the rest of 2019 and in 2020 as a means to bridge state budgetary gaps and as a part of broader tax restructuring measures.