Tax on Services Bill Gets Amended and a Hearing

May 21, 2018 – -The first hearing was held last week on a bill which would impose a 3% tax on professional services purchased by businesses in exchange for a 2% reduction in the statewide sales and use tax. The bill has already been given the “job-killer” label by the California Chamber of Chamber due to tremendous impact it would have on all businesses in California.  The Almond Alliance testified in opposition stressing the issues of impacts on businesses, how to allocate the tax when a contract includes both goods and services and the cost of compliance.

SB 993 (Hertzberg) was introduced to update California’s tax system to reflect the evolution of economic activities in California and to respond to the recent federal tax reform. California’s economy has shifted from an agricultural and manufacturing based economy to a services-based economy. In 1950 sales and use taxes accounted for 61% of the General Fund revenues and today it only accounts for 20%. Given the fact that the sales and use tax is the state’s second largest revenue source, the legislature has been looking for ways to expand the tax base to account for the lost revenue. This has been a goal of Senator Herztberg’s for some years now. SB 993 is his most recent attempt which has now taken a slightly different approach in response to the federal tax changes. He believes that SB 993 positions California to respond to the federal tax reform by taking advantage of business deductibility and passing savings onto consumers through a lower sales tax rate.

The bill, however, will likely not achieve that goal and will have much broader implications to not only businesses in the State, but for their customers as well. While proponents argue that this service tax would only “target high-end services” – such as lawyers or accountants – these services are a part of doing business, even small businesses. The result of any tax increase means increased costs for customers or businesses paying the difference. While the measure does include some exemptions including utilities, equipment and machinery repair, as well as services necessary in food production, the result will still be higher costs. SB 993 also creates confusion for multi state businesses because the service tax only applies to services received in California. Additionally, all businesses will have increased costs of compliance attempting to understand and implement the tax requirements.

The hearing, which lasted nearly two hours and included robust discussion on all sides of the issue, was the first in a series of hearings intended to hear feedback on the proposed bill.