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California SBE Report on Services Finds Potential $122.6 Billion Tax Take

California SBE Report on Services Finds Potential $122.6 Billion Tax Take

We continue to follow the volatile movement to tax services.  In response to a request from the Senate Committee on Governance and Finance, the California SBE last week issued a study with some astounding figures.

By: Joseph A. Vinatieri and Patricia Verdugo

At current sales tax rates, the potential tax take by taxing currently untaxed services would be over $122 billion dollars (yes—that’s a “B”). This figure, however, includes some services that under SB 8 (Hertzberg) would be exempt. But, even separating out those numbers, the revenue amount is astounding. For instance, the 2014/2015 state budget anticipated tax revenue from all sources (including personal/corporate income tax, sales/use tax, etc.) is only $106.1 billion.

Of great interest, the SBE also issued a “Fact Sheet” which points out some of the huge potential problems with implementation and administration of a tax on services, such as:

  • Significant cost for implementation,
  • Need for precision in definition of services and service providers subject to the tax,
  • Apportionment challenges regarding interstate service providers as well as nexus concerns,
  • Taxation of services for resale,
  • Huge increase in the underground economy,
  • Potential for referendum or repeal (cautioning that Florida, Massachusetts, Maryland, and Michigan, all enacted and later repealed a tax on services), and
  • Several other significant concerns

SB 8 is currently set for hearing on April 29, 2015, in front of the Senate Governance and Finance Committee. With this new information, normally I would say “strap on your seatbelt,” but in this case…make sure your shoulder harnesses are firmly affixed. The hearing promises to be enlightening.

For the Board of Equalization Revenue Estimate see http://www.boe.ca.gov/legdiv/pdf/ServicesRevEstimate.pdf.

For the Board of Equalization's Fact Sheet on Sales Tax on Services see http://www.boe.ca.gov/legdiv/pdf/Servicesfactsheet2015.pdf.

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