Sales Tax on Accounting Services

Background

Three states already tax professional services and do not exempt accounting services.  The states are Hawaii - 4%, New Mexico - 5%, and South Dakota – 4%.  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% on monthly receipts over $100,000, and the state of Washington has a 1.8% business and occupation tax on service providers.

In 2012, seven states (Arizona, California, Kentucky, Maryland, Michigan, New Jersey, and South Dakota) considered legislation to tax professional services, but thanks to great advocacy efforts by the state CPA societies and businesses, none of these states enacted the proposed tax. 

As states' economies shift from manufacturing to services (shrinking the revenue base in some cases), state legislators are likely to consider again this year sales taxes on professional services.  In the AICPA's annual survey of state CPA societies, 24 states anticipate that their 2013 legislature will consider a proposal to tax accounting services, and at least one proposal has surfaced already.  MinnesotaGov. Mark Dayton and Ohio Gov. John Kasich  recently proposed a sales tax on services that includes accounting services -- the MNCPAand OSCPA have already mobilized to oppose it.  

As we start the legislative season, the profession will continue to advocate against these proposals, pointing out that sales and use taxes on professional services are detrimental because a tax on accounting services: 

• Is very complicated to administer for states and taxpayers, as the multi-state nature of customers and service providers often makes it difficult to determine where, when, and how the services take place.  In fact, three states (Florida, Michigan, and Iowa) enacted and then swiftly repealed sales taxes on services, in part because of the complexity in administering the taxes.
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• Creates a competitive disadvantage for the state (compared to other states that do not tax services), discouraging relocation and expansion, which negatively impacts economic growth and development.
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• Discriminates against small businesses because small and emerging firms often have a need to use outside services that would be taxed, while larger companies with in-house expertise would not be taxed for such services.
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• Is regressive - as sales taxes affect everyone at the same tax rate, regardless of the individual’s income level.

2013 Update

27 bills have been proposed in 15 states.  (AZ, CT, IA, KS, ME, MN, MO, ND, NV, OH, OR, PA, SC, TX, WV)

AZ (H2590, S1221)
CT (H5031)
IA (HF52, SF 108)
KS (H2355)
ME (LD1110)
MN (S552, H677, H1394)
MO (HJR25)
NV (SCR1)
ND (S2232)
OH (H59)
OR (H3074, H3188, S675)
PA (H76, S76)
SC (H3116, S185)
TX (H3045, H3742, HJR130, S140, SJR12)
WV (H3033)

AICPA Resources

• AICPA Insights blog on Tentacles of State Tax on Professional Services May Reach CPAs

State and State CPA Society Resources 

• State CPA Societies Advocate on Sales Tax on Accounting Services (March 2013)
• ASCPA paper on Taxation of Professional Services (Dec. 2010), and Arizona Article on Taxing Services: Arizona's Untapped Revenue Resource, and Arizona Article on What if Arizona Eliminated Sales Tax Exemptions
• CalCPA Talking Points on Sales Tax on Services, CalCPA Info. on 2012 Proposed Legis. (AB 2540 and AB 1963) and Article on Sales Tax on Services Avoided for Now (June 2012)
• Delaware FAQs on the Gross Receipts Tax
• FICPA Information on Sales Tax on Services, and Paper on the Florida Sales Tax on Services: What Really Went Wrong?
• GSCPA Presentation on Special Council on Tax Reform and Fairness for Georgians (Oct. 2010)
• Iowa Information and FAQs and Details and Sales and Use Information on services not including accounting.
• KYCPA Paper on Tax Policies that Make Sense (2009) and KYCPA Presentation on State Economic Woes:  How Should Societies React?  Proactive vs. Reactive, and  Kentucky Information (June 2010) on Kentucky Discussing Application of Sales Tax to Services and Article (April 2010) on Taxing Services to Ease Budget Woes
• MACPA Paper on Oppose Sales Tax on Services (Jan. 2013), and prior paper (2011), and article on Maryland CPAs Fighting Proposed Tax on Professional Services, and blog on MACPA Prepares to Fight Sales Tax on Accounting Services (Sept. 2007) and MACPA Position Paper and Talking Points on Opposing Sales Tax on Professional Services (2007) and Maryland Economic and Fiscal Impact Analysis of Maryland Tax Policy Options (2007) and Maryland State Tax Committee Ten Criteria for Effective Tax Legislation (2007)
• Michigan Article on Governor Jennifer Granholm Endorses New Services Tax, Cutting Sales Tax to Support Businesses and Schools (Feb. 2010) and Michigan Article on Michigan Considers Extending Sales Tax to Service Industries (including accounting) (Jan 2007), and Michigan Information on the Use Tax, and Michigan Article on the Michigan Service Tax and 2007 HB 5198, and Michigan Article on Michigan Changes Course - Repeals Sales Tax on Services (Dec. 2007), and Michigan Article on Michigan Repealing the Law, and Article on Michigan Sales Tax on Services Repealed After 17 Hours and Article on Taxing Services in Michigan (Oct. 2005)
• MNCPA Talking Points/Paper on Tax on Professional Services (Jan. 2013), and MNCPA Legislative Outlook from 2012, mentioning a sales tax on services, and Minnesota Article on Dayton's Service Sales Tax Plan Lands with a Thud (Jan. 2013), and Minnesota Article on Businesses: Plan to Tax Services a Killer (Jan. 2013), and Minnesota Article (Jan. 2013) on Business Fights back on Dayton's Sales Tax Plan.
• NCACPA Paper on Opposing Sales Tax on Accounting Services (2006), and news article on Lawmakers Eye Sales Tax on Services (Jan. 2013)
• NJSCPA list of bills tracking (Feb. 2012) and NJSCPA article and FAQ and Presentation on beating back the sales tax on professional services. NJSCPA Article on the New Budget and Taxes, mentioning a sales tax on services that was enacted that did not extend to professional services due to the Society's advocacy efforts. (Jun 2006)
• OSCPA Paper on Sales Tax on Services, article on Governor proposal (Feb. 5, 2013) 
• PSCPA Sample Letter to State Representative/Senator on Opposing Sales Tax on Accounting Services
• South Dakota Information on the Sales Tax on Services and South Dakota Fact Sheet on Sales Tax on Services Applicable to Accountants and Accounting Services (Oct. 2012), and South Dakota Fact Sheet on Use Taxes (March 2011), and South Dakota Articleon South Dakota Proposed State Sales Tax Increases (Sept. 2011)
• TSCPA blog on First Call for Sales Tax on Professional Services (March 2011) 
• Washington State Information and Tax Facts (June 2010) and Information on the Business and Occupation Tax

 
Resources About Professional/Accounting Services Not Subject to Sales Tax in Specific States

• Connecticut and list of comparison sales tax rates (2009) and article
• Iowa list and FAQs of services does not include accounting (June 2009)
• Michigan and article on Michigan Changes Course - Repeals Sales Tax on Services (Dec. 2007)
• North Dakota
• Texas
• Utah
• Washington Presentation
• Wisconsin (July 2009)
• Wyoming  (Dec. 2012)
  

Other General Resources

• Council on State Taxation (COST) Paper on What's Wrong with Taxing Business Services?  Adverse Effects from Existing and Proposed Sales Taxation of Business Investment and Services (April 4, 2013)
• Sales and Use Tax Requirements by State (51 Jurisdictions) (May 2012)
• CCH White Paper on the Taxability of Services (Dec. 2009)
• Center on Budget and Policy Priorities Paper on Expanding Taxation of Services Options and Issues (2009)
• Tax Foundation Blog on a Sales Tax Word of Warning in Hawaii, New Mexico, South  Dakota, and Wyoming (Sept. 2011) and Tax Foundation Paper (Dec. 2006) on Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes and Tax Foundation Paper on State and Local Sales Taxes at Midyear 2012 (July 2012)
• FTA 2004 Survey and 2005 Survey on State Taxation of Services (May 2005) and 2007 Survey on Sales Taxation of Services Update and July 2008 FTA Survey on Services Taxation Update
• Article on Differences between a Sales Tax and a Gross Receipts Tax
• NY Times Article on States Seeking Cash Hope to Expand Taxes to Services (March 2010)
• Center for Tax and Budget Accountability Fact Sheet on Gross Receipts Tax
• Article on Tax Pyramiding (June 2007)

Resources Regarding Similar Issues and Concerns of Other Professions

• ABA Paper on Tax on Professional Services
• American Council of Engineering Companies Paper on Sales Tax on Professional Services
• Illinois Paper on Service Taxes 2011 Update (covering all states) (2011)
• Indiana Fiscal Policy Institute Issue Brief on Sales Taxation of Services in Indiana - Concepts and Issues (2009)
• Paper on Should Kentucky Tax Professional Services as a Way to Raise Revenue? (with works cited list) (Spring 2010)
• Pennsylvania Bar Association Testimony Against Expanding the Sales Tax to Cover Legal and Other Professional Services 
• Pennsylvania Bankers Association Paper on Expanding the Sales Tax to include Professional Services and article on Pennsylvania Legislators Oppose Sales Tax Expansion on Professional Services (May 2010)
• Pennsylvania Association of Health Underwriters Statement on Sales Tax on Professional Services
• Washington - Paper on Expanding Washington's Sales Tax Base (July 2008)
• Wisconsin State Bar Paper on Don't Tax Legal Services