Tax on Services: The Issue That Keeps Hanging Around.

• Author: Fox, Jason
• Position: Capitol Beat

Instituting a sales tax on services has been discussed in the Legislature in recent years as a way to counteract a volatile revenue stream. The proposals have focused on a revenue-neutral broadening of the tax base to include a more consistent stream of revenue coming into the state coffers.

In reality these types of proposals would impose a massive new tax on business activity, complicate an already complex state tax code and likely significantly increase the tax burden without any certainty that other tax liability or administrative costs would be offset.

CalCPA is one of many business groups strongly opposing any services tax that would have a disastrous affect on the accounting profession, as well as widespread unintended consequences to Californians.

Services Tax Heats Up

Senate Bill 993, authored by Sen. Hertzberg (San Fernando Valley), has been the most recent iteration of a sales tax on services proposal. It started as an attempt to counteract the impact of the federal tax law changes by taxing "high-end" business services.

Late in the legislative session, SB 993 was gutted and amended to implement a new services tax proposal and then set for a hearing in May before the Senate Governance and Finance Committee.

However, before the bill was heard, the committee chair and Sen. Hertzberg indicated there would not be a vote on the bill that day. Rather, they would present the bill, take testimony, open it to the committee for discussion and treat it as the first in a series of additional hearings on the topic of a services tax and broader tax reform.

Another hearing is scheduled for June 13 to discuss specifics and stakeholder input.

At this point, it does not appear there will be a vote on a services tax anytime soon, but it does start increased discussion of tax reform and how a services tax would fit into that

SB 993 Language

The new proposal would fundamentally change California's tax system by implementing a 3 percent tax on services provided to nearly every business. Even out-of-state businesses and service providers would be impacted, as the proposal applies the tax whenever a business receives or provides a benefit of a service in California.

It seeks to be revenue neutral by simultaneously reducing the sales and use tax on tangible goods by 2 percent. However, there is no certainty that the two taxes would offset each other, nor does it account for the costs of sorting out and complying with the new tax.

The measure exempts...