Legislative / Regulatory | Legislative & Regulatory | Tax | Taxation

Maryland sales tax on services proposal violates principles of good tax policy

At CPA Day in Annapolis, we gave copies of our 12 Principles of Good Tax Policy to our Maryland Legislators in an effort to provide guidance as they consider various tax proposals to deal with the revenue challenges facing Maryland. We also have testified on several bills this session to include CPA members of the MACPA on the various tax commissions to study tax structure for the future, the Commission on Tax Policy Reform and Fairness HB 185/SB 223 and the Maryland Tax Revision Commission HB 765. Maryland has licensed CPAs since 1901 to protect the public interest by having qualified, ethical, and up-to-date professionals serving the businesses and individuals in the state.

The most recent proposal to tax professional services in Maryland violates several principles due to the cost and complexity of compliance, the economic impact on the professions in Maryland, and the challenges of enforcement and collection.

[caption id="attachment_609664" align="aligncenter" width="339"] 12 Principles of Good Tax Policy by the Maryland Association of Certified Public Accountants[/caption]

Specifically, we believe this Sales Tax on Services proposal (HB 1628) violates principles No. 1, 2, 4, 6, 7, and 8. This is why we and our 8,000 CPA members stand in opposition to this proposed legislation.

  1. Equity and Fairness. Similarly situated taxpayers should be taxed similarly. Due to Maryland's proximity to surrounding states without this tax, professionals in DC, Virginia, Delaware, and Pennsylvania will have an advantage over Maryland CPAs, lawyers, engineers, and consultants. Maryland businesses will seek out-of-state professionals to provide the same services without charging a sales tax.
  2. Certainty. The tax rules should clearly specify how the amount of payment is determined when payment of the tax should occur, and how payment is made. This legislation is likely to cause confusion to businesses as the calculation of the amount of tax when their services are offered virtually and outside of Maryland will be subject to judgment and allocations. These calculations and judgments are likely to be challenged by revenue officers and tax auditors, making enforcement subjective and uncertain.
  3. Convenience of payment. Facilitating a required tax payment at a time or in a manner that is most likely convenient for the taxpayer is important.
  4. Effective tax administration. Costs to collect a tax should be kept to a minimum for both the government and taxpayers. The challenge here is determining the appropriate sales tax to charge when professionals and clients are mobile. How will you determine the Maryland portion when a CPA is at a tax conference in New York working remotely on a client with businesses in Maryland, Washington DC,  and Virginia? In fact, five states have passed similar legislation and had to repeal it due to the challenges in compliance auditing and enforcement.
  5. Information security. Tax administration must protect taxpayer information from all forms of unintended and improper disclosure.
  6. Simplicity. Simple tax laws are necessary so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner. See No. 4 above. The cost of accounting by the professional services firms serving multi-state clients will be prohibitive and given that almost no other states have this in place proves the point.
  7. Neutrality. Minimizing the effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction is important. See No. 1 above. Taxpayers in Maryland will be able to find CPAs just over the borders to save the 7.5 percent sales tax. Even if it is technically chargeable to out-of-state professionals, how will the comptroller know and be able to audit and enforce?
  8. Economic growth and efficiency. The tax system should not unduly impede or reduce the productive capacity of the economy. This tax will put all professional service providers at a disadvantage and the costs will be passed on to consumers creating a competitive disadvantage in Maryland versus all of our surrounding states (for instance, Virginia, Washington DC, Delaware, Pennsylvania, and West Virginia).
  9. Transparency and visibility. Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
  10. Minimum tax gap. Structuring tax laws to minimize noncompliance is essential.
  11. Accountability to taxpayers. Accessibility and visibility of information on tax laws and their development, modification, and purpose, are necessary for taxpayers.
  12. Appropriate government revenues. Tax systems should have appropriate levels of predictability, stability, and reliability to enable the government to determine the timing and amount of tax collections. ​

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Tom Hood