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California Tax on Services? Keep Your Eyes on This One…

California Tax on Services? Keep Your Eyes on This One…

By Joseph A. Vinatieri.

Newly elected California State Senator Rob Hertzberg (D – Los Angeles) recently introduced Senate Bill 8 which would expand the California sales tax to include services.  So far, SB 8 is only a broad preamble of why a service tax is necessary in an increasingly service oriented California economy. For example, the bill gives reasons why medical services would not be subject to the new tax (medical services are “necessities of life”, we assume, similar to why most food in a grocery store is not subject to tax). There also would be a corresponding lowering of the state personal and franchise/corporate income taxes as well as directed spending of the new revenues. But, interestingly, at the time of this writing the actual language of the imposition of the new tax on services is not in print.

Why is tracking this new services tax legislation so important? Because a major portion of the eighth largest economy in the world will now be subjected to taxation. We can fully expect many industry groups that are not currently taxable to be clamoring for exemption. There are huge policy questions involved and maybe it is time (again) to have this important discussion regarding California’s tax system. Should we exempt the service of writing custom software knowing that Silicon Valley and its software innovation is the gold standard of the world? Will software development then take place from non-California remote locations? If so, will there be a corresponding use tax on this service? Will Hollywood filmmaking become taxable? What about the fees that are earned in a multi-million dollar wrongful death case? And what about __[blank]­__ industry (just fill in the blank)?

We know that other states that have attempted taxation of services have had major problems defining those taxable services, implementing the services tax scheme, and dealing with the negative effects resulting from those newly taxable services (remember Florida?). For those of us living in the tax world, the most important matter is the actual language to be drafted because, as we all know, “the devil is in the details.” Suffice it to say, SB 8 will affect everyone from the small business one-person housepainter to the multinational conglomerate that utilizes sophisticated consulting services.  Better watch this one closely!

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