by Stephen W. Owens
Our legislature goes back to work shortly, facing another tremendous budget shortfall. Certain policy groups and politicians are considering trying to expand the state’s tax base to include a tax on professional services, which obviously would include lawyers. This consideration is due to the downward shift in Utah’s economy and the belief that Utah’s sales tax structure is still based on archaic manufacturing models rather than services-based realities.
Taxing Hardship & Basic Rights
Adding a tax on the many important services individuals and businesses need is unwise, because it would place yet another burden on those already suffering misfortune and vulnerability in their time of immediate need and personal crisis.
Lawyers, in particular, perform critical functions in transacting family, business, and financial matters, as well as enforcing and defending people’s basic rights. Lawyers also provide expertise to Utah businesses to help them conduct and protect their business matters. A tax on the sale of legal services would impose a serious detrimental impact on the ability of Utah’s people and businesses to retain help in carrying out basic commerce.
We all face inconvenience and hardships in the natural course of our daily lives. Our ability to deal with unavoidable events in our family, business, and financial matters would become more burdensome if our efforts to combat our misfortune became even more “taxing.” These are times when we need help and understanding, not hindrance and compounded hardship.
Tenants dealing with unreasonable landlords and landlords dealing with unreasonable tenants would be impacted. Anyone facing a criminal charge or harm from personal injury would be taxed. So would those having to deal with issues surrounding the death of a loved one, the trauma of divorce or child custody, the tragedy of domestic abuse, unfair housing restrictions, estate administration, real estate transfers, and credit/bankruptcy.
A sales tax on legal services would tax people for taking responsible steps to manage their affairs. Examples include persons who wish to protect their families by preparing a will and appointing guardians, individuals buying and selling their homes or businesses, and those who are incorporating a new business. Increasing the cost of legal services would deter individuals and small businesses from retaining lawyers at the outset, resulting in more costly legal problems and greater burdens on our state’s judicial system down the road.
Other Professional Services Impacted
Other professional services, including medical care, accounting, engineering, architecture, and real estate services, would also be affected. A sad consequence of this tax would then be that consumers will forgo needed services like preventative medical care because the prices will be higher. Even the less critical (but no less necessary) life needs like lawn care, physical therapy, clogged pipes, or home remodeling may be put off or ignored if they become more expensive.
It will be the consumers who pay the tax, not the plumber, lawn mower, physical therapist, hair dresser, barber, engineer, contractor, or architect. Everyday problems will cost more – from filing your tax return to a midnight run to the emergency room. Fighting cancer and chronic illnesses will cost more.
The small business that might be struggling to remain solvent will find its costs increased significantly when it must pay a tax on the professional services it receives. These include not only legal and accounting services, but computer, custodial, and security services. For most small businesses, a sales tax on professional services will increase the cost of doing business without corresponding, offsetting benefits.
Taxing professional services provided to businesses requires businesses to build the tax into the price of the goods or services sold, which will again be taxed upon final sale. Imposing a sales tax on the services used in the distribution chain results in pyramiding and in a substantially increased sales tax burden.
Utah Would be at a Disadvantage Nationally
This tax would place Utah’s businesses at a competitive disadvantage to states that do not tax professional services. This tax would discourage businesses and professionals from locating in Utah, resulting in lost job, wage, and tax opportunities. The tax would encourage Utah citizens to seek professional services from out-of-state providers. This is especially true of border communities and sophisticated clients, or clients of law firms that have out-of-state affiliates.
Only three states – South Dakota, New Mexico, and Hawaii – currently tax legal services. Florida and Massachusetts enacted sales tax on services, but promptly repealed the measures when they proved to be unpopular and difficult to administer. National advertising agencies refused to advertise in Florida. Several other states, including Maine, Maryland, Ohio, and Vermont, as well as the District of Columbia, rejected similar proposals. There is almost universal recognition that this tax is based upon unsound public policy.
Other Pitfalls With Taxing Legal Services
This tax would create a tremendous financial impact on practicing attorneys – especially if the tax is due when the client is billed, not when (and if) the bill is paid. The tax would require all lawyers to apply, account for, collect, and pay the tax, increasing overhead.
All communications between a client and his or her lawyer are confidential to protect the client. A tax audit on a lawyer’s alleged failure to properly administer the tax could violate the client’s attorney/client privilege, and create a greater burden on lawyers to continue to protect those communications.
There are also numerous unresolved questions as to the constitutionality of the proposed tax on legal services which the State might have to litigate over several years. These include taxing a person’s ability to defend him or herself in a criminal case, adding an impermissible burden to accessing the courts or exercising one’s rights, or violating equal protection, due process, separation of powers, and the Supremacy Clause rights. Taxing some professions while exempting others may violate equal protection laws.
Government officials are appropriately thinking outside the box on how to fund needed programs. However, adding a tax to professional services, and especially to legal services, would force people to forgo needed help at a time that they need it most. Please contact your legislators and make sure they understand that adding this tax is a bad idea.
Regional & Specialty Bars of Utah
Box Elder Bar Association
Cache County Bar Association
Angela F. Fonnesbeck
Central Utah Bar Association
Morgan T. Fife
Davis County Bar Association
Douglas D. Adair
Eastern Utah Bar Association
D. Karl Mangum
Federal Bar Association,
Garfield County Bar Association
Stephen H. Schwartz
Hellenic Bar Association
Utah Minority Bar Association
Park City Bar Association
Edward J. Stone
Salt Lake County Bar Association
Sixth District Bar Association
Ross C. Blackham
Southern Utah Bar Association
Michael F. Leavitt
Tooele County Bar Association
Uintah Basin Bar Association
D. Karl Mangum D. Karl Mangum
Utah Association of Criminal Defense Lawyers
Richard P. Gale
Utah Association for Justice
Bruce M. Franson
Utah Prosecution Council
Mark W. Nash
Wasatch County Bar Association
Corbin B. Gordon
Weber County Bar Association
Laura M. Rasmussen
Women Lawyers of Utah
Introducing the newest Utah State Bar Section:
Utah State Bar Elder Law Section
Robroy Platt, Chair