Last week, D.C. published regulations interpreting the district’s recent expansion of its sales tax base to include previously nontaxable services. Beginning Oct. 1, the district extended its sales tax to a motley assortment of services: bottled water delivery, bowling alley and billiard parlor services, car washing, carpet and upholstery cleaning, rug repair, health club services, self-storage and tanning.
In clarifying which services are now taxable, the regulations devote the greatest portion of their text to health club services. Before being overridden by the district council, Mayor Gray vetoed the tax on these particular services last July, calling it a “tax on wellness.” The regulations, which emphasize that only charges related to physical exercise are taxable as health club services, appear to agree. For example, charges for lounge pool memberships (by contrast with those related to physical exercise) are not taxable under the regulations. Those who instead choose to get that sun-kissed look at a tanning salon will be subject to tax.
In order to preserve their tax base, states have increasingly looked to extend their sales tax to previously nontaxable services. In addition to those now taxed by D.C., popular targets have included such services as tattooing, waste removal, and pet grooming. While the relationship between these services may not be immediately obvious, they are likely selected for taxation as services typically purchased by households. According to Michael Mazerov of the Center on Budget and Policy Priorities, economists generally agree that jurisdictions expanding their sales tax on services should focus on services purchased by households and shy away from taxing those primarily purchased by businesses. Among other reasons, this is believed to avoid the “pyramiding” of tax that might otherwise occur if taxes on services purchased by businesses result in higher prices of taxable goods and services produced by those businesses.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Prior to the district expanding its sales tax on services, the DC Fiscal Policy Institute proposed that pet grooming and performing arts (excluding opera) be included in the expanded list of taxable services. What other services typically purchased by households might have made the final list, but didn’t?
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