Tax on Professional Services Unlikely
Last week the Joint House and Senate Finance Committee listened to a two hour presentation from Legislative fiscal staffers focused on broadening the sales tax base by levying a tax on additional services. Broadening the sales tax base is being seriously considered in an effort to decrease North Carolina’s dependence on the personal income tax and as a way to lower the overall sales tax rate on all services. Currently North Carolina taxes 35 services – at the low end of the 50 states that tax services.
The personal income tax, which makes up over half of the state’s revenue from taxes (56.4%) is very volatile making the revenue base more vulnerable in bad times. And, although sales tax (27.9%) is a more stable source of revenue than the income tax, it is also growing more volatile due to legislated exemptions i.e., food, changes in consumption patterns and cross border shopping. In order to keep the sales tax income at 1/3 of the base, the tax would have to increase or the number of services taxed would need to be broadened. Only 11 states have a higher sales tax rate than North Carolina.
The presentation focused on the impact of major categories of services being subjected to the tax including a very broad category of amusements to include tickets to events, personal property repair and maintenance, personal services and pet care, etc. as well as a tax on professional services. The data seemed to support the premise that services consumed mostly by households and individuals would be the most advantageous way to broaden the base rather than services consumed primarily by business.
For Professional Services which includes land surveying, accounting, bookkeeping, legal, architectural, engineering, dentists, doctors, labs and out of hospital nursing, the information presented indicated that MOST TAX EXPERTS DO NOT RECOMMEND TAXING PROFESSIONAL SERVICES BECAUSE THEY ARE PRIMARILY CONSUMED BY BUSINESS – OR A BUSINESS TO BUSINESS TRANSATION. This is considered to be inconsistent with the purpose of the sales tax and can lead to tax pyramiding. Other reasons for not considering a tax on professional services are that it may create an unlevel playing field for small businesses and corporations that have multiple offices in other states can simply source the service to the state that’s not going to tax it creating competitive disadvantage for in-state business. Only 5 other states impose a sales tax on architectural and engineering services – which were combined in this presentation.
The revenue impact of taxing architectural and engineering services is $62.3 million to the State and $26.2 million Local. Medical and Dentistry Services had, by far, the highest revenue impact at $700.7 million to the State and $295.0 million Local. However, staff pointed out that that because government was a large consumer of medical and dentistry services through the Medicaid and Medicare programs, the venue would be quite a big lower.
Senator Clark Jenkins made the same case for architectural and engineering services. Because government is a large consumer of architectural and engineering services, the revenue impact from taxing these services could also be far lower as the sales tax would not apply to services purchased by government. The tax on architectural and engineering services brought in the least amount of revenue than any of the other services in this category.
Because the committee did not get an opportunity to ask many questions during the lengthy presentation, it is too early to determine if taxing additional services will be considered during the upcoming legislative session that begins in May. However, based on the information presented, it appears unlikely that a tax on professional services is a threat now or anytime in the near future.