By Brendan Fitzgerald, CPA 2012-2013
Chair of the Executive Board
The initial furor over the proposed sales tax expansion included in House Bill 59, Ohio’s biennial budget, seems like such a long time ago.
Busy season has a way of causing the calendar days to click by faster than the totals on the “U.S. Debt Clock.org” web page.
When the plan was first rolled out, OSCPA mobilized, polling our members to solicit input as we refined our position on the issue. While our position ultimately was to oppose the expansion, we did acknowledge the ambitiousness of the entire package.
Among other things, the proposed legislation would have expanded the sales and use tax to all services, unless exempted, which is an about-face from the current practice of assessing the tax on specific transactions. The concept of expanding the sales tax base to include services is not new, especially among public finance experts. But it turns out that it isn’t a panacea.
A few other states are developing their own version of the expanded tax on services concept. Florida in 1987 enacted a sales tax on services that was repealed by the end of the year. In 2007, Michigan repealed its sales tax on services law just 17 hours after it became effective. This is not to say a sales taxes on services is never appropriate, but it highlights the difficulty in implementing one.
Our efforts to have our position heard included testimony before the Ohio House Ways and Means Subcommittee. Special thanks is due to member and former Ohio Tax Commissioner Tom Zaino, CPA who testified on behalf of OSCPA during the subcommittee’s public hearing. His eloquence was equaled by the strength of his case.
OSCPA addressed the unintended consequences of the sales tax expansion proposal, including the competitive disadvantage caused by higher costs to businesses, and the likelihood business owners would seek professional service providers outside of Ohio to avoid the new tax. We did not ignore the use tax obligation that would still exist, but pointed out that tracking such transactions would be a significant challenge. Newly-registered vendors, legal battles over nexus and compliance — or more likely, enforcement — would undoubtedly strain the current department of taxation staff.
Unlike others who argued for exemptions for themselves or their industry, OSCPA addressed how the proposal would negatively affect Ohio’s business climate and potentially counter the positive initiatives already in place. Although there was significant opposition to the proposal by our members (over 80%), some did not see it as unfavorable. Proponents cited changes in our overall economic climate from a manufacturing-based to service-based economy, as well as the opportunity to generate substantial new tax revenue. By broadening the base to include services, they said, the outcome would be more fair. Sales taxes are regressive because they represent a larger portion of the income of lower income taxpayers. A solution to the regressivity argument, therefore, is to target those services consumed primarily by higher income taxpayers. Furthermore, if consumer spending continues to shift toward services, additional taxes on services might be needed to maintain long-term sales tax revenue.
The most recent iteration of the biennial budget bill — as passed by the Ohio House — removes the expanded sales tax on services proposal. While that is encouraging news, our work is far from done. The Ohio Senate now will evaluate potential reforms to Ohio’s tax system. Know that we will continue to weigh in on this and other public policy issues using the same yardstick: meeting the needs and expectations of our members while serving the public interest. Whether you supported or opposed the sales tax expansion included in HB 59, we need to hear from you. We likely have not have heard the last of sales tax expansion, but we will continue to make your voice heard on this issue.