Testimony

Testimony of the Pennsylvania Institute of Certified Public Accountants before the House Majority Policy Committee

February 18, 2004

On behalf of the 19,000 members of the Pennsylvania Institute of Certified Public Accountants, we are pleased to provide this written testimony to the House Majority Policy Committee on the question, "Should the State Legislature Broaden the State Sales Tax Base to Reduce Local School Personal Property Tax?"

The concept of broadening the Commonwealth's sales and use tax is certainly not a new idea. What is new is linking the sales tax base expansion to a reduction of local school personal property taxes. Currently, as you know, Pennsylvania's tax is considered "progressive" in the sense that it does not impose a state sales tax on food, clothing or professional services such as legal and accounting services, to name a few. Proposals to expand the sales tax should be thoroughly examined as they would eliminate these exemptions and impact a number of constituencies.

Below we have outlined preliminary areas of concern that need to be considered when discussing the expansion of the sales tax base. It should be noted that this list is not all-inclusive and not all the issues may apply in a given case.

Impact on Economic Development and Competitive Climate: Since taxes and economic development are inextricably linked, the Commonwealth may suffer unintended and unwanted consequences.

• Economic Development Impaired: Pennsylvania would be at a competitive disadvantage with other states that do not impose a sales tax on products and services that could become subject to the sales tax. Businesses may choose to locate or expand in states that impose fewer taxes and lessen the compliance burdens on businesses. This is particularly true for technology and service companies as they are generally very mobile and represent an important segment of the economy.

Administrative Complexities: An expanded sales tax brings with it tremendous enforcement and compliance issues, significant costs of compliance, and numerous administrative burdens.

• Enforcement and Compliance Issues: In addition to imposing compliance costs on businesses, the Commonwealth will incur additional costs for state administrative personnel and the creation of a system to enforce and collect the tax.

• Ability to Enforce: A tax should be structured to minimize noncompliance. While compliance with the existing sales tax on tangible personal property is very high (possibly with the exception of the use tax), compliance with a new tax on intangible items such as professional services may not be. In addition, the enforcement of a tax on services at the consumer level would be nearly impossible.

• Administrative burden: An expanded sales tax creates a different set of requirements for states that are accustomed to normal retail "point of sale" collection procedures. It entails added difficulties because of the dramatically increased number of new vendors that must be registered and monitored and the complexities of collection of use tax by out-of-state vendors. There is also the added difficulty of defining what is subject to the tax.

• Changes Needed to Other Laws: Changes in the sales and use tax statutes will create the need to change other laws and regulations. For example, if laws are changed regarding the imposition of sales tax on services, a corresponding change to the sale-for-resale provisions will be necessary. In addition, the consequences to the Streamlined Sales Tax Project must be considered.

• Difficulty in Determining Taxable Location of a Service: Expanding the sales tax involves a number of difficult determination issues particularly relating to professional services. For example, is the service taxable in the "performed location" or the "benefit location"? If different states chose different imposition choices, does the service get taxed in both places? If this is the case, how will tax offsets be applied? If the tax is imposed on the benefit location, how would allocation of service costs performed for a large business with divisions in multiple states be determined? What if the out-of-state service provider does not have nexus in the state and is, therefore, under no obligation to collect the tax? These are just some of the issues that will need to be addressed.

• Compliance: Compliance is made even more complicated when dealing with multiple taxing jurisdictions. For example, a professional service provider in one jurisdiction could very easily provide services in several nearby jurisdictions thus requiring the filing and remitting of sales tax in each of those jurisdictions.

Other Considerations

• Unpopular Tax: In 1987, Florida enacted a sales and use tax on services. The tax was repealed after only six months. Then in 2002, Florida attempted to amend the state constitution to include a sales tax on services. The courts determined that the ballot measure was unconstitutional. Likewise, in 1990, Massachusetts repealed its tax on accounting services after only one day when it proved to be confusing to explain and difficult to administer.

• Discourages Use of Professional Service: A consumer in an uncertain situation could be discouraged from seeking professional guidance on important questions when they must also pay state tax to get the correct answer. On the margin, the additional cost imposed by such a tax might push individual consumers to bypass needed health care, legal advice, and accounting advice.

• Chilling Effects: An expanded sales tax may levy a tax on consumers at a most sensitive or inopportune time, such as in conjunction with an IRS tax audit, bankruptcy, estate administration, or divorce actions.

Once again, on behalf of the 19,000 members of the Pennsylvania Institute of Certified Public Accountants, thank you for the opportunity to offer our input on this important issue. We look forward to working with you and the other members of the General Assembly as this issue moves through the legislative process.