The New Front Line: Transaction Taxes on Services.

AuthorFruchtman, David A.

The Expert: David A. Fruchtman

In South Dakota v. Wayfair, Inc., (1) the U.S. Supreme Court cleared a path for states to impose sales and use tax collection and remittance obligations on out-of-state businesses lacking physical presence within the state. Notably, the Court's decision applies to all subnational transaction taxes. Moreover, in the decision the Court manifested its loss of patience with Congressional inaction relating to the tax treatment of remote vendors. The Court did so by permitting states to impose such collection obligations on remote sellers of both services and goods. (All litigants in Wayfair sold goods, and the Court could have chosen to limit its holding to similar vendors. Instead, the Court applied its reasoning broadly, which might be the surest method for inducing action by Congress.)

Question: Is it likely that states will impose transaction taxes on a broad range of services?

Answer: In a word, yes. In the five years before Wayfair, ten states and think tanks proposed expanding specific states' sales taxes to a broad range of services through, in some states, the introduction of legislative bills or gubernatorial budget proposals. In those five years, imposing sales taxes on a broad range of services was proposed for California, Illinois, Indiana, Kentucky, Georgia, Pennsylvania, New York, New Jersey, Connecticut, and Vermont.

Significantly, for fiscal year 2016, the California State Board of Equalization estimated that imposing the state's sales taxes on services would raise $122 billion in tax revenue. This was some fifteen to thirty percent of all sales taxes collected by all states for that year. Although states other than California will experience smaller revenue boosts from taxing services, the potential increases in the amount of taxes collected will prove impossible for state legislators to ignore. Unsurprisingly, after Wayfair, expansions of sales taxes to services have been proposed in additional jurisdictions, most recently in Chicago (on legal services).

Fxonomists and academics have long advocated broadening the sales tax base. The crux of their argument is straightforward: there is no sound doctrinal reason for limiting sales taxes to retail sales of goods. (More about this below.) And it is certain that state legislatures will have no difficulty obtaining testimony from advocates of such expansion. Therefore, considering the 1) enormous potential increase in tax revenue from including a broad range of services in the sales tax base; 2) support from expert testimony; and 3) Wayfair's approval of states requiring remote businesses to collect taxes, legislators will need exceptional discipline to resist the pressure for such expansion.

As stated above, the impact of Wayfair's holding is not limited to state sales and use taxes. Rather, the holding applies to all transaction taxes imposed by subnational taxing authorities.

For example, the City of Chicago imposes a nine percent "amusement tax" on specified activities. The amusement tax is a transaction tax that is neither a sales tax nor a use tax. In 2015, the City of Chicago purported to extend the reach of the amusement tax to apply to services that stream programming across the internet (for example, Netflix and Hulu). However, at that time the City of Chicago Department of Revenue expressly refused to assert that it had a right to impose a responsibility to collect the tax on remote providers of streaming services.

Before Wayfair was decided...

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