Professional Services Alliance

The Facts




Professional services taxes are bad for state and local economies, constitute poor tax policy based on basic principles of economics, and have failed multiple times in the past.

Professional service taxes hurt state and local economies—both business and consumers alike.

Sales taxes on professional services encourage consumers to use out-of-state professionals due to tax differentials across state lines. Because professional services  are inherently mobile, many services can be performed anywhere regardless of where the provider or purchaser resides. If a state taxes professional services while other states do not, it encourages consumers to shop outside of state lines for a service provider, putting in-state businesses at a disadvantage. It also discourages multi-state businesses from expanding in the state, which further negatively impacts economic growth and development, resulting in lost jobs, wages, and tax revenues.

Compliance with a sales tax on services is extremely complicated for businesses large and small, and administration by state and local governments is costly. Due to the multi-state nature of customers and service providers, it is often difficult to determine where, when, and how the services take place and what services are actually covered.

While a tax on services would be difficult for all businesses small and large to comply with, it will be particularly burdensome on smaller service providers. What's more, small and emerging firms often have a need to use outside service-providers that would be taxed (such as external legal counsel or tax-filing services), while larger companies with in-house expertise could avoid taxation for such services as a result of vertical integration.

Finally, sales taxes on services are regressive in nature. Since sales taxes apply to all taxpayers at the same tax rate, regardless of income level, sales taxes fall harder on lower-income families with less ability to pay. The Institute on Taxation and Economic Policy (ITEP) estimates that the lowest 20 percent of households (based on income) forgo seven percent of their income to pay sales taxes, while the top one percent forgoes less than one percent.


Historically, expanding sales taxes to include professional services has failed.

Although many states tax a few select services, there is no trend of states successfully and broadly expanding their sales tax base to include professional services. Even at the height of the recent recession, most states looking at a sales tax on professional service rejected the idea as inherently unworkable.

In 2016, 18 states saw 29 bills containing tax on service language introduced in their respective legislatures. However, none of the bills were successfully enacted. The same has been true over the last several years. There are multiple examples in recent memory of states attempting to enact a tax on services but promptly replying it shorty after enaction:

  • In 2014, Minnesota enacted a tax on warehouse and storage services. Following the tax's passage, there was a large outcry that the tax would negatively impact the state economy and harm jobs and investment within the state. The tax was repealed prior to its effective date.
  • In 2013, Massachusetts approved legislation expanding the definition of services to include computer software and design services. The new tax faced immediate backlash from the tech and services community resulting in the Governor signing legislation repealing it two months later.
  • In October 2007, Michigan enacted a broad tax on services and a taxpayer coalition was quickly formed to repeal it. The group was worried that it would negatively affect jobs. The tax was repealed 17 hours after it became effective.
  • In 1990, Massachusetts passed a tax on services that applied only to services provided to businesses (that is, it taxed business inputs explicitly). The state repealed the tax two days after it took effect because of the fear of economic harm and potential job loss.
  • In 1987, Florida passed a sales tax on services. Six months later, they repealed it because it put in-state businesses at a competitive disadvantage to out-of-state counterparts.

In addition to these historical failures, no current-day major industrial state levies a sales tax on professional services. Only three states tax services broadly (Hawaii, New Mexico, and South Dakota), but all three of these are low-population states with unique tax systems and state economies. Each of them has a population of two million or less, and each has different revenue resources driving their tax systems. For example, South Dakota does without income taxes, depending much more heavily on sales tax, and Hawaii is geographically isolated, leading to less interstate competition.



Economic theory teaches that business inputs shouldn't be taxed, something that nearly all professional services are. 

Economists and public finance experts agree that business inputs shouldn't be taxed under the sales tax. When business inputs are taxed, taxes pile up on one another along the production chain, resulting in double and even triple taxation (with taxes becoming embedded in the purchase price) -- a phenomenon known as "tax pyramiding." Tax pyramiding leads to numerous negative economic effects, such as creating arbitrary price differences between similar services, industries, and business. 

A significant share of professional services are business inputs (that is, business services purchased by other business to be used in the production or provision of another good or service.). The Council On State Taxation (COST) estimates that approximated 42 percent of existing state and local sales tax revenues in the 2014 fiscal year were levied on businesses. Taxing professional services will only exacerbate this problem.