Opinion: Why Taxation Of Services With Utah House Bill 441 Is A Bad Move
The details of Utah House Bill 441 (HB 441) are out now and one of the big changes is the addition of sales tax for services business to offset the reduction of the state income tax rate. This shifting of tax burden is claiming to benefit Utah families but in the end, it is just a fancy game of shifting who gets taxed that hurts local jobs and hides one tax reduction (income tax) with an increase via many small transactions (sales tax).
The Argument for Taxing Services
The supporters of the bill argue that there is a need to distribute taxes as our economy moves increasingly to services. Others say that in the spirit of fairness and broadening the tax base, all businesses should have to contribute to sales tax. There is also the argument that education is funded by income tax while sales tax funds the rest of state government and sales tax has declined in recent years. All are fair — but are they the right arguments?
What About Those Online Sales Taxes?
All states got a big boost in sales tax revenue last year with the Supreme Court Wayfair vs. North Dakota decision. For Utah, this resulted in $285 million in new taxes which the state preemptively allocated to their budget. One can assume that online sales tax revenue will only increase as consumers continue to embrace the convenience of buying online.
Guess who is paying those online sales taxes? The consumers, not the businesses. Check your latest online purchase, it most likely has sales tax on the receipt. That said, the sellers of online goods don’t get away without costs: they are responsible for collecting and filing their sales taxes creating added costs with no direct benefit to their business.
Taxation Compared to Neighboring States
With HB 441, Utah will become one of the only states in the West to have comprehensive services taxation. Accordingly to Avalara, there are only 3 states that currently tax professional services, 15 that tax personal services, and 18 that tax business services. Not exactly a club we should be excited to join.
If you think being competitive doesn’t impact business growth, just ask New York City about how they feel about Amazon HQ2. Businesses can choose where to serve and where to employ, and differences in regulation have real impacts.
Why Services Shouldn’t Have Sales Taxes
Tax law always picks winners and losers. I spent nearly 20 years working for software companies before getting involved with accounting services full-time. I wondered why sales tax didn’t apply to services professionals. Shouldn’t they carry the same burden? Here are some reasons:
· Most service businesses are small. It is very difficult to scale a service business. Service businesses are often small businesses and they deserve a reduction in government regulations and costs with their limited profits. The Fiscal Note for the bill spells this out clearly: “Enactment of this legislation could result in a large increase in the regulatory burden for Utah residents or businesses.” Is that really what we want?
· Service jobs are Utah jobs. When you get your hair cut or have your lawn mowed you are employing those closest to you. Sales tax creates additional barriers for starting and growing businesses where we live.
· Service jobs employ lower-income individuals. For every accountant or lawyer, there are many other service jobs that employ lower income individuals. Sales tax costs for service businesses mean less money for employing workers.
My Bias
As the COO of LedgerGurus, an accounting service company, there is obvious impact to our business should HB 441 pass. Taxes don’t add revenue or jobs to businesses, they only add hassle and costs. Sales taxes in particular are a lose-lose-lose for businesses, consumers, and government alike. With the business, there is the added hassle to collect and file sales taxes. For consumers, they typically pay sales taxes as most business will simply pass those costs on. For government, there is the added burden to collect and process filings.
To be honest, the change in tax code may be a net positive for LedgerGurus. We will pass on sales tax to our customers without reservation. Any loss in customers will likely be more than offset with new sales tax service opportunities.
Despite any business opportunity benefits for us, this bill is bad for our customers and bad for any service business. I would rather help our customers focus on growing their business strategically, than staying compliant with the state.
Why the Rush
While there are some good arguments about the need for restructuring Utah’s tax code, why are legislatures rushing this process? At minimum, this 257-page bill should be rigorously debated publicly. It has been public since February 26, yet the sponsors are trying to push it through in two weeks. Let’s tap the brakes on this bill and have a public discussion on the merits of such changes.
Real Tax Reform
Real tax reform should come in the form of simplification and government cost reduction. When new laws cut taxes in one area only to add taxes in another area, there is no winner. Real tax reform should focus on simplification and reduction for the need of additional tax revenue.
Utah has historically been a business-friendly state which has (in part) helped fuel the tremendous economic growth in recent years. When it comes to HB 441 and the addition of taxing services, this is a huge step in the wrong direction.
