The taxation of CPA services has been a hot topic in several state legislatures this year, as states sought to correct expected revenue deficits.
“Some states will be facing budget challenges between 2021 and 2022,” said Megan Kueck, senior state regulatory and legislative officer at AICPA. “They are considering expanding their tax base, and this expansion of the tax base may include taxes on professional services.”
States have debated for years whether to broaden their tax base to include professional services, typically those offered by CPAs, lawyers, real estate agents, and architects. In recent years, legislatures have become more creative in their consideration of these taxes, according to Kueck, as rising state budget deficits have put more pressure on lawmakers to find ways to finance transportation needs, education and other social services.
Effect of the pandemic on government tax revenues
As the economic woes of many states worsen due to the combined effects of the pandemic and economic shutdowns, “we expect interest [in this legislation] increase dramatically, ”said Joe Crosby, CEO of MultiState Associates of Alexandria, Va., which tracks legislative activity in state houses across the country. In addition to monitoring legislation, his company conducts advocacy campaigns and testifies before state legislative committees on behalf of his clients, which are businesses and professional organizations, including the AICPA.
According to MultiState analysis, there is a “high probability” that bills to tax professional services will be introduced this year in California, Connecticut, Illinois, Kansas, Maryland, Pennsylvania, Rhode Island , Virginia and Washington.
Colorado, Minnesota, Nebraska, Oklahoma, Texas, Vermont and Wyoming may be “willing” to consider such legislation, according to MultiState.
In West Virginia, Governor Jim Justice proposed professional services tax legislation in exchange for the state income tax cut in his State of the State address in February.
The measure failed but had proposed a professional services tax somewhere in the range of 6%, the same as the state sales tax, according to Kueck. She said the taxes on professional services offered are generally at the same rate as a state’s sales tax.
She credited the efforts of state-owned CPA companies at the local level for stopping many such invoices in the past. “Their tenacity has been invaluable to the profession. We work with them, but they have the covered playground.
Targets of professional services for taxes
The legislator’s interest in the taxation of professional services has a long history. The issue gained national attention in 1987 when Florida passed a broad service sales tax that was quickly repealed thanks to opposition from state companies. In 2007, Michigan enacted and then repealed a broad sales tax on services
In 2019, Utah lawmakers accelerated legislation that would have taxed professional services.
“There was a ton of uproar there,” Kueck said. “Hundreds and hundreds of letters have been sent to state legislators. “
Similar bills also failed that year in Connecticut and Wyoming. In 2020, Maryland introduced a bill to extend taxes on professional services, but its state-owned CPA company was successful in putting that legislation on the back burner.
“The accounting profession and other relevant professions will work diligently to ensure that lawmakers understand the deleterious impacts of passing this type of legislation,” said Crosby.
Bipartite interest in taxes on professional services
Interest in taxing professional services, he said, comes from both sides of the aisle and for different reasons.
“Lawmakers in conservative states believe the best thing they can do for citizens is to enable businesses to provide a higher standard of living, and the best way to do that is to lower taxes on production.” , did he declare. “More progressive elements believe that the best way to improve the well-being of citizens is to provide more and better government services, and you need to raise taxes to do that. “
These proposals fail because they are poorly designed from a fiscal or economic standpoint, according to Crosby, who pointed to data from the Commerce Department’s Bureau of Economic Analysis (BEA). Eighty-one percent of accounting services (including bookkeeping and tax preparation) are provided to businesses, according to the BEA. Government and non-profit purchases constitute 10% of accounting services. The remaining 9% is purchased by individuals, and almost all of these services are for tax return preparation.
“Even if you wanted to impose a tax on that minor leftover – personal tax preparation services – it’s kinky,” Crosby said. “You tell people that you will tax them only because they have to comply with tax laws.”
– George spencer is a freelance writer based in North Carolina. To comment on this article or suggest an idea for another article, contact Chris Baysden, a JofA associate director at [email protected].