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PROPOSED TAX ON SERVICES: IT'S BACK

 

By Allen L Phillips      

Auto repair shops in California presently only add sales tax on parts installed, not on labor.  California Senate Bill 640 (SB-640) would add a tax on that labor as well as on other service labor such as plumbers, gardeners, accountants, etc.

This bill is an exact copy of last year's SB-1445, which I wrote about in August, with all the same ambiguities.  If passed in its present form, unelected bureaucrats will decide the amount of the tax, as well as all the other undefined aspects of the bill. 

Reprinted below is my article from last August.  Nothing has changed except the bill number.

Please contact your representatives in Sacramento and tell them to vote no on SB-640.

 

CALIFORNIA SENATE BILL (SB-1445 640) WOULD ADD A TAX ON SERVICES

By Allen L Phillips

August, 2016

Presently, when you have your car repaired you pay sales tax on the parts but not on the labor.  Likewise your plumber charges you tax only on the parts he uses.  Your tax accountant does not charge you tax on his or her services.  Likewise your computer repairman.  SB-1445 640 would change all that.

The stated intent of SB-1445 640 is:

1)  Provide tax relief to middle and low income Californians while "simplifying" the personal income tax and mitigating the reliance on top income earner's tax revenues.  They say such reliance has led to much instability in tax revenues due to economic cycles.  (Note that "simplifying" is ambiguous and no more detail is provided in the bill.)

2)  Broaden the tax base imposing a "modest" sales tax on services in the interest of producing "more stable revenues".  Health care services, education services, child care, rent, interest, and services provided by "very small" businesses would be exempt and offsetting tax relief would be provided to middle and low income families.  (Note that "modest" and "very small" are nowhere defined in this Bill.)

3)  "Lower" the corporate income tax on "small" businesses, exempt "very small" businesses from the sales tax on services and "significantly reduce" the minimum franchise tax.  (Again, more undefined terms: "lower", "small", "very small" and "significantly reduce".  And, if we qualify as a "very small business", does "exempt very small businesses from the tax" mean we don't have to pay it when buying services or we don't have to collect it when we sell?)

SB-1445 640 would also create the Retail Sales Tax on Services Fund within the State Treasury.  The Board of Equalization, which collects such taxes, would deduct an administrative fee and then deposit the remaining new services tax into the Fund.  Moneys in the fund would be "appropriated " to:

1)  Provide tax relief to "middle and low income" Californians to offset the effect of the sales tax on services.   (Raising the tax for some but not for others is another effort at social engineering and, of course, will require more bureaucrats to administer.  Also note that what incomes are considered "middle and low incomes" is not defined.)

2)  "Assist in securing greater stability for California's infrastructure, its workforce, and its health care and education systems including higher education."  (Those are lofty goals but, again, nothing is quantified.)

3)  "Enhance California's business climate and incentivize and protect small business."  (Enhance California's business climate - is this a joke?  Who writes this stuff?  Do they really believe it?)

Let me clarify something.  Businesses use services too.  We hire subcontractors, lawyers, accountants, computer gurus, etc.  "Very small" businesses will be exempt.  What does that mean?  If our tax accountant is a 1 man shop will his service be exempt from the tax?  What if we use a larger firm?  The tax will be "small" but what does that mean?  It makes no sense that some service providers, providing the exact same service, will have to charge the tax but others won't simply because they are "very small". 

And they are going to "lower" corporate income tax on "small" businesses.  "I will gladly pay you Tuesday for a hamburger today", said Wimpy in the old Popeye cartoon strip.  At least you understood his terms.

To suggest that this will enhance California's business climate is ludicrous.  SB-1445 640 will push California farther toward the top of the list of states with the worst business climate. 

I have read quite a few proposed bills over the years and this is by far the most poorly written.  If passed in its present form, unelected bureaucrats will fill in the blanks.  I don't think we want that.

Ultimately the consumer will pay if this bill passes, whether directly with the tax on services or indirectly  as businesses raise their prices to cover their increased costs of doing business because of SB-1445 640.

My limited research indicates that California is one of very few states that doesn't already charge a tax on at least some services.  But that doesn't mean that California should tax services.  According to the Tax Foundation, California is already among the worst 10 states for business tax climate and battles New York and New Jersey for absolute worst. 

Utah leads Forbes’ ranking of the Best States for Business for the second straight year and fifth time since 2010.  The Beehive State benefits from light regulation and energy costs that are 23% below the national average.  Utah does tax most services but, because of other business friendly factors, no one is complaining.  See the difference?

Contact your state legislators and tell them to vote no on SB-1445 640.