Sales Tax on Professional Services

Issue 

Property taxes are not a new issue in Pennsylvania. For nearly three decades, state legislators have considered a variety of proposals to reform the property tax system and, consequently, the system for funding public education.

One proposal that continues to garner legislative attention is the Property Tax Independence Act (Senate Bill 76 and House Bill 76). The plan calls for the complete elimination of all school property taxes – about $12 billion annually – and replacing with a mix of other taxes, including a sales tax on accounting and auditing services.

Legislative History

In November 2015, Senate Bill 76 was narrowly defeated by a vote of 24-25. The proposal would have increased the sales tax from 6 percent to 7 percent, increased the personal income tax from 3.07 percent to 4.95 percent, hiked the hotel occupancy tax from 6 percent to 7 percent, and continued to use existing revenue generated by slots gaming to shift away from school property taxes. See how your senator voted.

PICPA Position

The PICPA strongly opposes legislation that would impose a sales and use tax on accounting, auditing, tax, and related professional services because it would have a direct negative impact on Pennsylvania taxpayers.

A Renewed Threat

Senate Bill 76 continues to garner support in Harrisburg. The CPA-PAC is determined to fight it.

Discussion and Explanation 

The issue of expanding sales and use taxes to include professional services has been linked in Pennsylvania to the elimination of school property taxes. The PICPA has several concerns with any proposal that seeks to tax accounting, auditing, and related professional services.

No current-day major industrial state levies a sales tax on professional services. Only three states tax services broadly (Hawaii, New Mexico, and South Dakota), but all three of these are low-population states with unique tax systems and state economies. Each of them has a population of 2 million or less, and each has different revenue resources driving their tax systems. For example, South Dakota does not levy an income tax, depending more on sales tax.

Historically, expanding a sales tax to include professional services has failed. Four states have enacted a sales tax on professional services in the past – Florida, Massachusetts, Michigan, and Maryland. All four quickly repealed their laws before or shortly after going into effect due to concerns of an unfair impact on in-state providers versus out-of-state providers. Additionally, lawmakers found that it was difficult to source the service or to determine when and how services were being delivered. 

Significantly reordering a state’s tax and revenue systems is a major undertaking that can have dramatic implications. If the state’s effort to shift to a services tax was only partly successful, and estimates were wrong and significant revenue was not collected, the state would have to make up potentially hundreds of millions of dollars in lost revenue within the same fiscal year. This would disrupt many major programs and harm the state’s reputation with businesses.

The expansion of the base of taxable services also creates a competitive disadvantage within the states seeking to enact such proposals. None of the states that are contiguous to Pennsylvania currently tax services, and by enacting a sales tax on services, lawmakers will negatively affect economic development and discourage the use of professional services. Pennsylvania would be discouraging relocation and expansion of businesses in the Commonwealth.

A tax on accounting, tax preparation, and related professional services -  even one that exempts business-to-business transactions -  is an unfair taxation on the services necessary to comply with state and federal tax laws. To tax compliance with these laws compounds the tax burden borne by individuals. Note, this could be perceived as double taxation by many consumers.

Finally, and most significantly, the economic projections for the Property Tax Independence Act (SB/HB 76) simply do not add up. It would create a historic funding deficit for public education in Pennsylvania. According to an Independent Fiscal Office October 2013 analysis and report, “There is no discernible fiscal impact in the first year (FY 2014-15), but the proposal has a negative net fiscal impact over the subsequent four years contained in the forecast. A simulation of the proposal using 11 years of historical data from FY 2002-03 to FY 2012-13 confirms this general pattern.”

For more information, contact the PICPA Government Relations Team at governmentrelations@picpa.org or (717) 232-1821.

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PICPA President's Letters to the Editor

Julius Green wrote the following letters, which were picked up by several publications across the state. Below is just a small sampling of that coverage.

March 31, 2016 - "What Do These Real Estate Tax Proposals Really Mean?"
Times-Tribune
Express-Times

Nov. 17, 2015 - "Sales Tax Expansion Hinders State Revenue Growth"
- Times Leader
- Daily Local News