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Supreme Court Decision Opens Door for Taxing Professional Services

The Supreme Court provided a historic 5-4 ruling on June 21, 2018 with its opinion on South Dakota v. Wayfair.

2019-01-08

The Supreme Court provided a historic 5-4 ruling on June 21, 2018 when Justice Kennedy delivered the Court’s opinion on South Dakota v. Wayfair. The Court upheld a South Dakota law to establish a sales tax nexus for any seller with $100,000 or more of its instate sales annually or with 200 purchasers instate annually, even if the seller is not physically present in the state. Advocates fear the result of this decision may be an increase in state attempts to tax professional services.

Shortly after this ruling, the House Judiciary Committee held a hearing on July 24, 2018 about the effects of South Dakota v. Wayfair. A written statement by witness Andrew J. Pincus Partner, Mayer Brown LLP, indicated that the ruling is a slippery slope, “First, States may seek to impose new sales taxes or professional services taxes on the sale of digital goods and provision of services of all types to customers in the State, and impose accompanying collection obligations on sellers or service providers that have no physical presence in the State.” It is possible this Supreme Court ruling allows states greater taxation power and flexibility to go beyond their scope and increase taxes on professional services.

As America continues to move toward a service-oriented economy, states must find new populations to apply sales tax. Professional service taxes are dues on services provided by licensed professionals, such as lawyers and accountants, and may include landscape architects. These taxes are different from personal services, which individuals mostly utilize, and the services include dry cleaning, pet grooming, tanning, etc. In the last few decades, many states have passed professional service taxes to try to “modernize the economy.” However, states repealed many of those laws hours after passing because they found such a tax would make the economy less competitive. Currently, there are four states that tax all services, including professional services: South Dakota, Hawaii, New Mexico, and West Virginia. Five states tax fewer than 20 services: Colorado, Illinois, Massachusetts, Nevada, and Virginia.

It is much easier for a state to tax personal services than professional services for several reasons. Location of where the service is performed and received is key to a services’ taxability. Most personal services occur in the same location, however, many professional services can be purchased in other, more tax friendly states. Therefore, it is easier to tax personal services than professional services because the source of the service is easier to identify. 

This does not mean that professional services are immune from taxation. There is a looming threat on professional services from South Dakota v. Wayfair. Several states have passed bills to increase their revenues through taxpayer nexus, and other states have implemented factor-presence nexus statutes. These statutes set a threshold for entities outside of the state based on payroll, property, and sales, and if the entity exceeds those thresholds, they are subject to the nexus tax. 

While landscape architects have not yet felt this effect, it is important the American Society of Landscape Architects and its members remain vigilant about professional service taxes.

Contact

Kevin Fry
Director, PR and
Communications 
kfry@asla.org

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JR Taylor
PR Coordinator 
jtaylor@asla.org 

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