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Tentacles of State Tax on Professional Services May Reach CPAs

TentacleCould your clients be required to pay a sales tax on your CPA tax and accounting professional services? Could states really “tax a tax service” that CPAs provide to taxpayers who need these services to comply with the increasingly complex tax law and accounting rules?

Well, three states already tax professional services and do not exempt accounting services, so CPAs in those states can speak to its impact. 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 already surfaced. Minnesota Gov. Mark Dayton recently proposed a sales tax on services that includes accounting services -- the MNCPA has already mobilized to oppose it.

As we start the legislative season, the profession will continue to advocate against these proposals and emphasize 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 In fact, three states (Florida, Michigan and Iowa) enacted and then swiftly repealed sales taxes on services, in part because of the complexity in administering the taxes.
  • Creates a competitive disadvantage for the state (compared to other states that do not tax services) by discouraging relocation and expansion, which negatively impacts economic growth and development.
  • 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 subject to a tax for such services.
  • Is regressive, as sales taxes affect everyone at the same tax rate, regardless of the individual’s income level.

As this issue arises in various states, I encourage CPAs to become active with their state societies to advocate against these proposals. I just did that with my state society, the Maryland Association of CPAs on their CPA Day. It was a great experience to hear about Maryland’s priority issues and discuss opposition to a proposed sales tax on accounting services with my local delegate and senator.

Interacting with your state representatives through your state society gives you a chance to speak up and do your part for the profession. And as states consider introducing such legislation in 2013, the AICPA will continue to work with state societies to oppose proposed taxes on accounting services. Working together, we can amplify the voice of the profession so that state legislatures will continue to listen to CPAs.

Eileen Reichenberg Sherr, CPA, MST, Senior Technical Manager – Taxation, American Institute of CPAs. Eileen staffs the State and Local Taxation Technical Resource Panel and the Trust, Estate and Gift Tax Technical Resource Panel. She is responsible for the development and submission of comments to Congress, Treasury and the IRS, and developing tools, updates and alerts for members. She has a Master’s degree in Taxation from The George Washington University.

Tentacle image via Shutterstock.

Edited: 4:56 p.m. ET on Feb. 11

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