This has been a crazy week in Annapolis as Maryland lawmakers are rushing to find a source of funds for the Kirwan Commission legislation supporting Maryland education.
Our opposition is not a reflection on the importance of Kirwan. Rather, it is to prevent the passage of bad tax policy that may be doomed to repeal once the realities of the complexity and cost of implementation, administration, and collection are realized. That is where we as CPAs added a different argument to the debates this week.
Our perspective was not solely in self-interest, although that is clearly one of our objectives. Our opposition has to do with the cost and complexity of this type of legislation and why no other state has this type of sales tax on professional services, especially as it relates to business-to-business services.
In testimony on HB 1628 on March 2, several panels of business groups referenced this additional cost beyond the sales tax itself. These often “hidden costs” are known as compliance burden, or the costs of complying with government laws and regulatory requirements.
The fiscal note to HB 1628 from the Department of Legislative Services outlines the challenges with this type of legislation well.
“According to the National Conference of State Legislatures, states have faced several barriers to taxing services. These barriers include:
- Administrative challenges in quantifying and tracking the value of services provided and determining where to source the sale of a service;
- The difficulty in defining the new base (i.e., developing clear definitions of services); and
- Tax pyramiding, where the taxes on business-to-business sales are factored into the final sale price of a product.”
It goes on to say that a number of states — including Louisiana, Massachusetts, Michigan, Nebraska, Pennsylvania, and Utah — have proposed similar legislation to tax services more broadly. In fact, our research (see article, “Past attempts to expand sales tax to services have failed“) would add Florida and Minnesota to the list, along with Massachusetts, Michigan, and Utah which actually passed this type of legislation and had to repeal it for the very reason talked about in the fiscal note.
The fiscal note starts by saying there are five states with sales tax on services — New Mexico, South Dakota, Hawaii, Washington, and West Virginia. It turns out West Virginia and Washington are also not comparable because they exclude taxes on professional and business-to-business services, which means our map of states that have sales tax on services is correct with only three states.
That means 47 states do not have sales tax on services for professional business-to-business services.
This is why our core testimony is that this is simply not good tax policy and will have a significant adverse impact on Maryland businesses and our economy.
Here is a short video outlining the details of this form of legislation as it relates to professional (business-to-business) services like accounting, tax, audit, consulting, legal, engineering, etc.