Professional Services Sales Tax Exemptions Seems Safe in Final Session Days (The State Journal)

April 3, 2017

West Virginia lawyers and other professionals are breathing a little easier now that the 2017 legislative session is winding down and their sales tax exemption seems to be intact, though that still could change in the blink of an eye.

Of course, the state’s budget situation remains fluid. With a near half-billion dollar deficit looming, lawmakers must find a way to bring spending under control while generating new revenue. And that means nothing, including sales tax exemptions, is final until the gavel drops.

“You never know until the final package is complete and the bell rings, but we feel comfortable that the Legislature and others have come to understand a tax on professional services could be detrimental to West Virginia,” said Jill Cranston Rice, partner in Dinsmore & Shohl’s litigation department and president of the Defense Trial Counsel of West Virginia. “It’s not really a tax on lawyers, it’s a tax on services — it’s the consumers of those services that would be taxed. It definitely would have to be passed through to consumers; West Virginia code prohibits law firms from absorbing (those costs).”

An early budget plan from the House of Delegates initially looked at lowering the state’s sales tax from 6 percent to 5.5 percent and removing a number of tax exemptions, including the professional sales tax exemption. Members never voted on that proposal and instead have shifted focus to the Senate’s budget bill. That measure initially proposed streamlining income tax brackets, adding a 3.5 percent food tax, increasing the sales tax to 7 percent and removing exemptions for some previously exempt services — delivered newspapers, funeral/embalming services, hair, skin and manicure services, non-medical personal care services, telecommunications services, solid waste disposal services, electronic data processing services, educational summer camp tuition, health and fitness club memberships, primary opinion research services, transportation of passengers in interstate commerce, music instruction, artistic performance admissions and travel agency fees.

Negotiations to find a solution palatable to both houses, as well as the governor’s administration have been ongoing.

“If West Virginia were to change its law, we would be the only state east of the Mississippi River (to tax professional services),” West Virginia Chamber of Commerce President Steve Roberts said. “And at the rate contemplated, we would have the highest tax on professionals in the country.”

The chamber helped lead resistance to measures that would have stripped professionals of their sales tax exemption. Roberts said only three states — New Mexico, South Dakota and Hawaii — currently tax professional services.

“What we have recognized is professional services firms in West Virginia are an important part of our economy,” Roberts said. “We want them to thrive here, to grow here. We don’t want them to have a tax that would be the highest levied in the nation. We’ve worked very hard to preserve the exemption because we don’t believe professional services companies — engineering, architectural firms, media firms, CPAs, law firms — should have to charge their customers and clients sales tax. We want to make West Virginia attractive to these types of companies. It’s a growing sector of our economy; we want them to come here.”

Will Turani, director of global operations for Orrick, said losing the sales tax exemption would have enormous implications for the firm, which employs more than 300 people at its Global Operations Center in Wheeling. The GOC handles back-office operations — IT, knowledge management, lawyer development, human resources, finance, graphic design, marketing and client intake — for Orrick worldwide.

“It’s not just financial (though). We estimate it could have a million dollar-plus impact on us,” Turani said. “It’s also the opportunity to further grow and expand our operations here in Wheeling. If the services we want to grow, our attorney population and our Orrick Analytics Department (were to be taxed), it would cause the firm to take another look at whether they want to further grow those operations here in Wheeling.”

Turani said Orrick’s Wheeling operations center is “doing well; we’re one of the strongest employers in the Ohio Valley.”

“We have opportunity and talent in the Ohio Valley,” he added. “If you have opportunity and talent you can grow and prosper, but the problem is, if you (strip) the exemptions and add $1 million-plus to your operational line item, it doesn’t help when firms are considering growing and expanding. That goes for any business: When you plan for expansion, you take into consideration all factors, including costs. This would be a cost you didn’t have before, which would absolutely have to be taken into consideration.”

The Virginia-based Professional Services Alliance insists taxing professional services would be burdensome to small firms, put professionals in border counties at a cost disadvantage and encourage customers to use out-of-state practitioners. PSA points out, while many states have considered a broad-based professional services tax to raise revenues, “There is no evidence that this would work, given that no state of any significant size has attempted broad-based professional services taxation.” The group also points to three states that tried taxing professional services only to hastily reverse themselves: According to PSA, in 2007, Michigan, faced with blistering opposition, repealed its professional services tax 17 hours after it took effect; Massachusetts, fearing economic harm and job loss, repealed its rules after just two days; and Florida waited just six months to undo its professional sales tax in 1987 “because it put in-state businesses at a competitive disadvantage to out-of-state counterparts.”

“No major industrial state levies a sales tax on professional services,” PSA notes. “Only three states tax services broadly (Hawaii, New Mexico and South Dakota), but all three of (them) are low population states with unique tax systems and state economies. Each of them has a population of 2 million or less and each has different revenue resources driving their tax systems.” PSA points out Hawaii is geographically isolated, for instance, while South Dakota has no income tax so it depends much more heavily on sales tax.

“If you think about it, Hawaii, South Dakota and New Mexico are not places people think of going to for architectural services or accounting or lawyers,” Roberts said. “But they do come to West Virginia for those services; we serve clients in many states from West Virginia locations. It’s a growing segment of our economy, and we want to be competitive so that segment of our economy can continue to grow. What you have to look at is how many additional would have to pay — tens of thousands of additional taxpayers would pay it. It’s a pass-through tax, so it would not be the lawyers or accounts who pay, it would be their clients.”

Roberts said about three-quarters of West Virginia’s population “lives in a border county or within easy driving distance of another state.”

“They could just pick up their phone and buy services … in an adjacent state and totally miss paying the tax in West Virginia,” he said. “For big corporations, a $100,000 legal bill is not unheard of in certain situations. If a $7,000 tax is put on it … that would be a real incentive for them to shop the work somewhere else.”

Rice points out state law prohibits professionals from absorbing sales taxes, “so it’s really not a tax on lawyers, it’s a tax on the services lawyers offer.”

“It’s a tax on the individual who has brought a claim after he or she has lost their job or been injured, or an individual going through a divorce or a custody dispute and need (help) or someone who needs an estate plan,” she said. “It’s the consumer of the legal services who is going to pay.”

Rice said taxing professional services would put West Virginia professionals at an enormous competitive disadvantage because “none of the states West Virginia borders taxes legal services or professional services.”

“If clients have a choice of a West Virginia lawyer or a lawyer in Ohio or Indiana or one who is Atlanta-based whose services are comparable but not taxed, we’re going to be at a competitive disadvantage,” she added. “My firm represents businesses across the globe and across the country. We can do transactions in any of our West Virginia offices, but also, just as easily, from any of our other offices. We want to retain that work in West Virginia and keep our West Virginia lawyers working and, more importantly, have a lot of really good jobs for our support staff here in West Virginia, so this is a jobs issue, too.”

Roberts maintains lawmakers “need to raise revenue in a way that’s not (penalizing) any one industry.”

“We can’t raise peoples’ taxes every time government decides it wants to spend more money,” he said. “We need to rein in spending, but at the same time, adequately fund the services of our state.

“I would suggest the governor and the Legislature meet in the middle: He’s not going to get all he wants in terms of increases, but the Legislature’s not going to get what it wants … but there is room to compromise.”

Roberts is optimistic state government can fix the budget without irreparably harming any one sector.

“This is part of the process,” he adds. “The Legislature is doing what it’s supposed to do in terms of reviewing the spending requests of various departments. They’ve actually done a very good job delving into those requests … taking a good, close look at them and coming back with their own (thoughts). That’s exactly what they’re supposed to be doing.”