MNCPA PERSPECTIVES

Taxing professional services: The more things change, the more they stay the same

Jan. 23, 2018  |  Geno Fragnito

2017 brought significant changes to politics: President Trump, tax reform, and uncertainty with international relations. What will happen in 2018 is anyone’s guess.

Despite these changes, my experience is when it comes to state and federal government, the more things change, the more they stay the same. I agree that bringing in newly elected officials and new perspectives is good for driving innovation and progress. But, perspective without historical context can result in one thinking that an idea is new when, in fact, the idea has been debated many times in the past.

This is the case at the Minnesota Legislature. As the 2017 session was winding down in May, everyone was focused on balancing the state’s budget and passing a Minnesota tax bill. What many people didn’t notice was a bill to tax accounting services was introduced on the second-to-last day of session, and has flown under the radar until now.

  • SF 2428 (Senator Roger Chamberlain)
  • HF 2716 (Representative Steve Drazkowski)

Look familiar? Indeed, we last saw a similar proposal during the 2013-14 legislative session when Democrats controlled the House and Senate. There was a lot of spirited debate but, at the end of the day, legislators decided taxing professional services was not the best route to take in Minnesota.

Today, Republicans control the House and Senate, and it is the Republican legislators who are taking the lead on this issue this time. A new idea to them, but a debate that has already taken place many times in the past 30 years.

The more things change, the more they stay the same.

A look at the numbers

Here are the latest Department of Revenue estimates for accounting, legal and management consulting services.

Estimated Revenue Generated from a Professional Services Sales Tax*

Business to Business FY 2018 FY 2019
Accounting Services $193,600,000 $202,000,000
Legal Services $245,200,000 $255,600,000
Management Consulting Services $181,900,000 $189,500,000
Consumer Purchases FY 2018 FY 2019
Accounting Services $23,800,000 $24,800,000
Legal Services $97,500,000 $101,400,000

*Data taken from 2016 Minnesota Department of Revenue Tax Expenditure Budget

As you can see, taxing professional services would generate significant new revenue. But at what cost?

There are many potential problems with a tax on services, including (but not limited to):

  • Multiple points of delivery and use
  • Multiple points of creation of the service
  • Unintentionally encouraging consumers to shop for services out of state

In addition, tax reform discussions at the Capitol have focused on decreasing unintended noncompliance and reducing complexity. I’m not convinced implementing a new tax on professional services would accomplish either.

Many states have considered taxing services, and some states passed a services tax only to repeal it later (many times, before the new tax was effective). Clearly, taxing professional services is bad tax policy.

This debate has been around for decades. Each time, the proponents believe their approach is different and will make sense. We’ll have to wait and see what makes 2018 different than the last 30 years of debate.

Learn more about the MNCPA’s position on taxing accounting services

And, if you want to get involved in the discussion, contact me or comment below.

Attend CPA Day at the Capitol

March 7 | 8 a.m. – noon | St. Paul | 3 CPE credits | Free for members
CPA Day at the Capitol is your opportunity to join MNCPA members and carry a unified message to legislators and legislative leaders. Many issues will be debated that affect the CPA profession, including a proposal to tax professional services. Help shape the discussion and debate by sharing your perspectives and expertise. Lawmakers are relying on you. 

Attend CPA Day at the Capitol

Topics: Legislative, Tax

Geno Fragnito

Geno Fragnito is the MNCPA’s government relations director, advocating on behalf of the CPA profession. His days consist of last-minute meeting changes, building relationships with lawmakers, helping CPAs navigate state government, and putting in more than 15,000 steps per day walking the halls of the Capitol. Geno unwinds with a little golf and traveling with his family. If he weren’t a lobbyist, Geno would perfect his cast and be a professional fisherman. Geno can be reached at 952-885-5550 or gfragnito@mncpa.org.

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Comments


Brenden Schaaf commented on Jan. 24, 2018:
Thanks, Geno, for being on top of this. Deja vu...


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