Tax Reform Friday: California Senate Sets Its Sights on Services Tax


 

While the California proposal to offer deductions for charitable donations as a response to the 2017 federal tax act (Pub. L. No. 115-97) has garnered considerable notice, it is not the only legislation prompted by federal tax reform. California state Senator Robert Hertzberg's (D) S.B. 993, would also make significant changes to the state's tax regime.

The bill sets out to reduce state revenue reliance on personal income and reflect the economy’s shift from goods to services by imposing a 3 percent tax on services purchased by businesses. The gradual 3 percent tax on services would be implemented along with a corresponding 2 percent decrease in the state sales and use tax rate. Consumers would potentially benefit from the reduced sales and use tax, while companies would be able to deduct services tax payments from their federal returns. Though Hertzberg has proposed a business services tax previously, he thinks that federal tax reform has created an opening this year by lowering the overall corporate income tax rate.

Opponents to the bill, ranging from the Council On State Taxation (COST) to trade groups representing various sectors of the economy, claim that the new services tax would create costly and time-consuming compliance burdens, especially for service-focused businesses. Even though the bill specifically exempts certain industries like education and health services, opponents also claim the exemptions are not specific enough to cover inputs to those industries. In a memo to the California Senate Governance and Finance Committee, the California Chamber of Commerce claims the tax will have a “pyramiding” effect and increase the cost of various goods and services for all consumers, as reported by the Daily Tax Report: State (subscription required).

The California Senate Governance and Finance Committee heard the bill on May 16, 2018, and the next, more in-depth hearing will occur on June 13, 2018.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Would a tax on services provided to businesses be sound tax policy?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.