Legislative Update: Tax on Legal Services and Sales Tax Reform in Utah

1. Legislative Update including the Current Status of the Tax on Legal Services and Sales Tax Reform Utah Bar ConventionJuly, 20 2019 H. Dickson Burton – President, Utah State Bar Steven Young – Holland & Hart   Foxley & Pignanelli – Lobbyists, Utah State Bar Douglas S. Foxley, Frank R. Pignanelli , Stephen D. Foxley

2. Issues to Potentially Address • Flexibility Issue • Utah the only state to constitutionally earmark a major revenue source (income tax to education). • Options: • Amend Constitution to remove or convert to % • Move education fund $ to general fund without a constitutional amendment.

3. Issues to Potentially Address • Sales Tax Broadening Issue • Services now comprise more of the economy • Sales tax on goods may track inflation and population growth, but a narrower segment of the economy pays them if focused only on goods. • Broaden the base/lower the rate where feasible • Expand to Business Inputs/Professional Services?

4. Dangers of Tax Pyramiding

5. Dangers of Tax Pyramiding • Increases Costs of Production • High Tech, BioTech, Mfg, Mining, Ag • Drops NPV of In-State Production • Puts Utah businesses at a competitive disadvantage in international, national and regional markets • Drives capital, investment and employment outside Utah • Creates economic distortions • Hidden taxes either raise consumer prices or result in lower wages • Lacks transparency as the true tax rate to the final consumer is much higher than the stated rate • Encourages companies to vertically integrate instead of using more efficient providers • Interstate Sourcing Issues

6. Worldwide Consumption Taxes Avoid Tax Pyramiding • International Value-Added Taxes • Only Tax “Value Added,” with credits for previous taxes paid to avoid pyramiding • U.S. Sales Taxes (1930s) • TPP Based • Broad Resale Exemptions to Avoid Pyramiding • Ingredient Parts/Containers • Broad Production Equipment & Fuel Exemptions • No State with a Sales Tax Like Utah’s taxes professional services

7. Worldwide Consumption Taxes Avoid Tax Pyramiding • If expand to more services: • 2004, 2005, 2009 & 2017 Utah task forces say essential to exclude all B2B transactions to avoid economy crippling pyramiding • Other states say the same

8. Experiences in Other States - Connecticut

9. Experiences in Other States - Connecticut

10. Potential Final Consumption Transactions to Tax • Professional Services? • States do not tax them because primarily B2B and thus significantly impacts economy to do so. • Where not B2B: • Legal • Taxing those in crisis (Criminal/Domestic) • Access to justice issues • Taxing landlord and not tenant, patient & not hospital in same case • Accounting • Taxing government mandate of tax preparation

11. Potential Final Consumption Transactions to Tax • Professional Services? • No state with a sales tax on the final customer (like Utah) taxes them • 45 States Have a “Sales Tax” • 31 states tax the buyer like Utah – seller is only a collector • 5 states tax the seller, but require collection • 9 states tax the seller and do not require collection • AZ, AR, CA, HI, IL, MI, NM, SD, WI • Functionally a Gross Receipts Tax • No sourcing issues

12. Potential Final Consumption Transactions to Tax • Professional Services? • Only three states in this “gross receipts” category tax professional services (SD, NM, HI) • All are much smaller than Utah • SD has no income tax • HI is not trying to attract production • NM has chosen to impose both an income tax and a gross receipts tax on the seller. Has amongst the highest tax pyramiding in the nation.

13. Potential Final Consumption Transactions to Tax in Utah • Already Included in Utah (where some states do not): • Remote Vendors (Wayfair) – as of 1/1/19 • Marketplace Facilitators – as of 10/1/19 • Admissions • Digital Goods • Repairs and Cleaning of TPP

14. Potential Final Consumption Transactions to Tax in Utah • Many other states include and Utah does not: • Food (Full Tax) • Gas & Electricity (Full Tax) • Delivery Charges • Interstate Transportation of Goods • Intrastate Transportation of Goods or People • Copying • Installation Charges (to other TPP, or to RP) • Cleaning or repairs of RP • Garbage removal services • Lawn Care • Pest Control • Snow Removal • Tree Trimming

15. Potential Final Consumption Transactions to Tax • Many other states include and Utah does not: • Water conditioning/softening service • Information access • Admission, Accommodation, Rental & Purchase Surcharges • Fishing/hunting guide services • Barber & Beauty Parlor • Moving TPP • Kenneling • Marina rental/boat docking • Pet grooming, SAAS, photography and engraving (clarify)

16. Potential Final Consumption Transactions to Tax • Many other states include and Utah does not: • Safe deposit box • Storage • Tanning • Tattoo Parlor • Taxidermy • HVAC • Sign-painting/lettering • Credit reporting • Security Services • Interstate Telecommunications • Paging

17. Most Discussed Alternatives to Sales Tax on Professional Services • Increase sales tax on food • Remove income tax dedication (with possible base requirement) • Statewide property tax • Streaming tax • Rideshare Tax

18. Public Response toLegislative Tax Reform Task Force Meetings, Town Halls, Chamber gatherings and other events. • Lawyers and Bar officials have attended every meeting • Other professional associations and members enhanced opposition • Overwhelming opposition to sales tax on professional services • Utahns expressed willingness to solve problem, but want correct information • Appreciation for opportunity to participate • Those willing to be proactive are likely to drive outcome

19. Action Items for lawyers in sales tax debate • Bar is limited to discussion of “access to justice” • Attorneys need to remain in contact with legislators • Attorneys should inform clients of potential of sales tax on professional services • Attorneys can raise issues with other organizations • Track Committee website • Be proactive in offering solutions and ideas

20. Resources for Lawyers in Sales Tax Debate • Utah Bar Emails and website • Tax Restructuring and Equalization Task Force website:le.utah.gov/asp/interim/Commit.asp?Year=2019&Com=TSKTRE • Stronger Futures Website: https://strongerfutures.utah.gov • Utah Office of Budget and Management

21. Other Legislative Issues of Interest • Inland Port • Medicaid Expansion • Medical Marijuana • Growth Management and Housing

22. Bar Activity with the Legislature • Bar Restrictions of advocacy: “Access to Justice” • Government Relations Committee (GRC)- every identified bill reviewed and analyzed • GRC recommends to Commission • Commission determines ultimate decision • Legislation reviewed by Sections • Sections can support and oppose dependent on member approval

23. Bar Legislative Activity • Over 90 bills reviewed by GRC and sections • Commission voted to support 9 bills and oppose 10 bills • Litigation funding transparency, expungement, 2 new Third District Court Judges, abuse of process • Fairly successful in results • Success in defeating taxes, changes to practice of law • Success in promoting access to justice