As a means of raising revenue, particularly during times of economic crisis, many states revisit the idea of imposing a tax on professional services, whether as a sales tax (including lifting an exemption in many states’ sales tax code for professional services), an excise tax, gross receipts tax or as a new form of fee applicable only to professional service providers. One justification for this is an often mistaken assumption that the providers of these services, including lawyers, are lucrative and easily absorb such a tax, and that such a tax will not have a material impact on those seeking services assistance. It is also mistakenly believed that service providers are unduly enriched without such a tax and the revenues raised will significantly contribute to state deficits. Of course, this all ignores the reasoning that led to keeping such services free from taxation in the first place. Rarely would such a tax have a meaningful impact on deficit budgets, and whatever contribution it would make is often more than offset by the harm to vulnerable populations and potential impact to state bottom lines in the long run.
Currently, only three states have a tax on legal services – Hawaii, New Mexico and South Dakota – which takes the form of a gross receipts tax in each state. One state, Florida, did impose a sales tax but problems with the cost of administration and enforcement led to its prompt repeal. Nevertheless, Florida along with many other states, has repeatedly come close to approving some version of such a tax.
- What does “professional services” mean or include?
- What’s the difference between a sales, excise, and gross receipts tax?
- What about dedicated fees?