Personal vs. Professional Services (or why not tax lawyers?!)

Tax experts agree that the appropriate sales tax base should include all goods and services purchased by the final consumer, which also implies business purchases should be exempt. The challenge is applying these principles while considering practical and political realities.

During the Tax Council’s press conference, A.D. Frazier discussed the rationale used by the Council in determing what services to tax. He said they tried to minimize compliance costs for taxpayers. One way they did this was focusing on vendors who were already filing sales taxes because they sell some type of tangible property. For example, the service department at your local automobile dealership already charges sales tax on parts — it’s not too difficult for them to add the sales tax to the services that are already itemized on your bill.

The Council also only considered services currently taxed in at least 20 other states. For example, health care and housing could legitimately be taxed, but few other states tax these services and it is safe to say the politics of such a change would not be good, particularly in this economy.

The majority of professional services, which include legal, accounting, investment management, engineering and health care among others, are provided directly to businesses and are added to the final cost and taxed as a part of the final product. Services provided directly to individuals, however, are another matter.

Taxes on professional services can be avoided be because it usually does not matter where the person providing the service is located. For example, it takes one phone call to switch an investment account from a broker in Atlanta to one in Charlotte. A legal case could be handled by the law firm’s Washington, D.C. office instead of the Georgia office. Yes, it might be possible to identify these interstate payments and demand Georgia sales tax to be paid, but this would be expensive and would likely face opposition not just from the taxed industries, but from citizens concerned about the “Big Brother” aspect of tracking personal financial transactions. Worst case, a Georgia tax on professional services could push our many investment, accounting and consulting jobs to another state. (Remember the role our branch banking regulations in allowing Charlotte to steal banking jobs from Georgia?)

While the Tax Council recognized professional services provided to individuals should technically be taxed, they came to the conclusion that the time is not right due to practical realities, compliance costs and economic impact concerns.