By Anne Rosivach
Maryland CPAs are mounting a coordinated effort to fight a proposed sales and use tax on professional services that will specifically apply to management consulting and tax preparation services. Lawmakers in Maryland have proposed the measure as one way to solve the state's budget problems.
"Federal and state governments mandate the filing of various tax returns that are so complicated, most small businesses and individuals seek out the services of CPAs to help file their returns", Maryland Association of CPAs (MACPA) Executive Director Tom Hood explained. "It seems unfair to then tax the services they need to stay in compliance."
Hood and other members of the MACPA, who took time out of busy season to testify about House Bill 1051, Sales and Use Tax - Services before the Maryland House Ways and Means Committee, stated they oppose the legislation because:
- Taxing professional services like tax preparation and management consulting would hurt small businesses and individuals in the midst of a very fragile economy.
- Enforcing the measure would be nearly impossible. Taxes on professional services are difficult to determine, calculate, and enforce. Three states – Florida, Michigan, and Iowa – have tried this and had to repeal because of this complexity.
- It would put Maryland CPAs and service providers at a competitive disadvantage. Neighboring states do not impose such taxes, making Maryland CPAs less competitive and forcing them to shift taxable services to their out-of-state offices, should they have that option. This also will shift income related to those services to those states.
- It is an unfair tax policy. If you have to tax management consulting and tax preparation services, than why not all services?
Hood closed the day of testimony by giving lawmakers one example of how the law would affect residents of the state. "If legislation calling for a sales tax on services (HB 1051) is passed, every Marylander who experiences the death of a loved one will have to pay 6 percent on the preparation of their estate tax returns. That means you are proposing a tax on taxes."
In an exchange with AccountingWEB, Hood gave some additional insight on the many problems that would be associated with a tax on professional services:
Why did Florida, Michigan, and Iowa repeal the professional services taxes in such a short time?
Hood: Florida repealed this years ago shortly after implementation and Michigan and Iowa more recently. The reason was the difficulty in compliance.
What are some of the potential compliance issues?
Hood: How do you calculate where and when intangible services like tax, consulting, and accounting are delivered, and to/from where? Let me give you an example: A Maryland CPA is attending a conference in New York City and working remotely. He is providing tax and accounting services to a client with offices in Delaware, Maryland, and Virginia. Where are his services coming from and in which jurisdictions are they taxable? Is the service taxable in New York City (his physical location) or allocated among the states of the client he is working for? You can see how big of a mess this can be for any sized CPA firm and for the tax collectors when they try to audit compliance with the law.
How would a professional services tax be imposed and enforced in Maryland? Would it be based on gross receipts, for example?
Hood: Gross receipts has been considered on several occasions and defeated. We vigorously oppose it on the basis of it being fundamentally unfair. This type of tax could result in a business taxpayer paying a large tax bill even with net operating and possibly cash losses. This could cause bankruptcy or other significant unintended harm. Maryland has lumped tax and consulting services in specific legislation to tax a whole list of services, which we have testified on and mobilized opposition from our CPAs.
Minnesota is considering a tax on both accounting and legal services. Would the Maryland tax apply just to management consulting and tax services? Would it apply to tax preparation?
Hood: Yes, the services tax specifically mentions both consulting and tax preparation.
Tom Hood writes in his blog that several members of the House Ways and Means Committee were asking questions during the testimony about fairness; for example",Why aren't lawyers listed on the list?" They also asked about the "tax on taxes" component and mentioned numerous letters from Maryland CPAs and firms.