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Get a better understanding of state arguments against broadening the sales tax base.
Efforts by states to enact sales taxes on traditional services—landscaping, accounting, dry-cleaning, legal advice, etc.—have been an “uphill battle” for years. That said, future efforts to tax services may encounter far less friction as states scramble to address budget shortfalls in the wake of COVID-19. As such, it is important to understand the factors that have stymied most state legislatures’ attempts to apply sales taxes to services.
“Imposing sales taxes on services has its detractors,” writes Roxanne Bland, a former Multistate Tax Commission member, in a recent Tax Notes State article. “Among other things, some argue that taxing services discriminates against small businesses that cannot perform the needed services in-house, unlike a larger company. A state wishing to tax services might discover that doing so is not as simple as it seems. Imposing tax on an activity previously untaxed requires a new tax structure that must be built from the ground up. Further, there are questions of what services, if any, should be exempt from tax.”
Even when a state clears those hurdles, other obstacles lurk. Lobbying efforts can derail proposed legislation. Bills calling for sales taxes on services that seem likely to sail to approval also can get upended by political outcry, as West Virginia’s legislature discovered in 2017.
Bland, now a contributing editor with Tax Notes State, assesses the pros and cons of this type of tax reform. The arguments against include:
Additionally, Povich notes that taxes on many services are regressive given that they can have an outsized impact on lower-income taxpayers. In 2017, Povich reported that 23 state legislatures “considered proposals to impose taxes on at least some services. But so far, none have made it into law intact—and most die outright.”
Despite that track record, however, state legislatures may have far better odds of applying sales taxes to services in the coming 12 months, as Vertex Principal Economist and Tax Policy Advisor George Salis explains in his post.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.
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