State Senator Renewing Push for Business-to-Business Service Tax

Thursday, May 17, 2018

After testing the waters for the last three years, state Sen. Robert Hertzberg (D-Van Nuys) is making his strongest push yet to pass legislation that would impose a tax on services provided to businesses.

Hertzberg says Senate Bill 993 would better align the state’s tax code with the shift toward a more service-based economy. By 2022, the bill would create a new 3 percent tax on services — such as legal representation, accounting, design work and consulting — delivered to businesses in California.

Hertzberg estimates that the new tax would bring in about $14 billion per year. To offset the tax increase, the bill includes a 2 percent decrease in the state's sales tax by 2022. Not only would the sales tax reduction save money for consumers, Hertzberg said, it would generate increased business for companies that sell goods in California.

The California Chamber of Commerce and the National Federation of Independent Business have expressed opposition to the bill, arguing that the tax would pose an onerous burden on businesses in California — especially small businesses.

“We think this bill would be a severe tax burden on small businesses,” said Shawn Lewis, spokesman and lobbyist for the NFIB. “It would make California even more unfriendly to small business owners.”

Tax reform has been a focus for Hertzberg in recent years — an undertaking that he compared to “walking to the moon with elephants on our back” during a committee hearing on Wednesday. Every year since 2015, the senator has introduced legislative language to create a business-to-business service tax — but found little appetite among his Capitol colleagues to take up the issue.

Hertzberg said he saw an opportunity this year for the bill to gain traction, after the passage of the federal tax overhaul in late 2017. The new federal law reduced the corporate tax rate. Hertzberg believes lawmakers will be more open to passing the service tax bill in light of the reduction in the federal corporate tax.

Business groups, however, decry the bill as an added burden in what is already a burdensome state to do business.

“California seems to have an endless appetite for taxes,” said Lewis. “But we also have a surplus. Why are we trying to raise taxes wherever we can?”

Interest groups add that the bill would disproportionately impact small businesses in California. Large businesses often have in-house accountants, attorneys and other staff to provide the services that small businesses often have to buy from other firms, making small businesses more likely to be subject to the tax.

“A lot of small businesses depend on services to stay in businesses,” said Sarah Boot, a policy advocate for CalChamber. “Larger businesses can bring those services in-house, but not small businesses."

Hertzberg countered that the impact of the new tax would be offset by the 2 percent decrease in the sales tax, especially for businesses that sell goods.

He also noted that the bill includes exemptions from the business services tax for health care and education services, child care, rent and services provided by very small businesses.

Boot said that CalChamber's initial assessment found that the reduction in sales tax would not offset the new service tax for businesses, but that she was unable to share further information about the assessment.

The Senate Governance and Finance Committee heard testimony on the bill Wednesday and is expected to vote on the legislation June 13.

Source: Sacramento Business Journal

Category: Economic Development