Proposals on Legal Services
While the District of Columbia threatens to impose one of two looming tax proposals on all businesses, including lawyers and law firms, The District of Columbia Bar's 68,500 members are joining forces to ensure fairness.The district's battle follows similar action in Ohio, Vermont, Maine and Maryland. Last year, bars in these states helped to defeat legislative proposals to tax professional services, including legal services. While the states' legislatures secured funds by raising existing taxes or finding other revenue sources, bar leaders feel their victories are temporary.
Such taxes would be far-reaching if enacted since all consumers, regardless of income level, would pay the same amount. The tax would be specified on the lawyer's bill to the client. In turn, the lawyer or law firm would remit the taxes to the state--most likely for the general fund--just like any other merchant. This would require additional bookkeeping measures and other tracking expenses.
Issues such as portability and compliance also surface. If neighboring states offer the same service with no tax, or at a lesser tax, many consumers may take their business elsewhere. Then the professionals face new rules and regulations, and the state itself takes on an added burden to ensure compliance.
These states are not alone in the tax war. Hawaii, South Dakota and New Mexico already have a tax on legal services, according to information compiled by the American Bar Association State Legislative Clearinghouse.
However in the district's case, taxes may be directed at businesses as well as anyone earning income in that jurisdiction, not those receiving legal services.
The DC battle
District of Columbia businesses, including solo practitioners and law firms, face two different tax proposals this spring that may be adopted for the 1999 budget. In February, a 0.35 percent gross receipts tax was proposed by the district's Office of Tax Revenue. While this proposal affects any business that earned revenue in the district, it would eliminate the $250 annual professional license fee (that each active bar member pays), and reduce commercial real estate, utility and personal property taxes.
Then, the district's Tax Revision Commission proposed a 1.1 percent to 1.7 percent value-added tax on all taxable employee income, compensation and dividend and interest income, which includes lawyers. This proposal would also eliminate the annual professional license fee and reduce commercial real estate taxes in order to attract more businesses to the city.
To address the impact of these two proposals, the District of Columbia Bar held a special meeting in March and its members voted by referendum to allow the Board of Governors and other bar leaders to examine the proposals and lobby on behalf of the bar. By March, a task force was formed, and meetings were held through April with the Office of Tax Revenue and the Tax Revision Commission, as well as various coalitions of law firms, the city council and Chamber of Commerce.
"We realize that DC needs tax revenue, but lawyers should not be disproportionately impacted by these tax proposals," says Carolyn Lamm, president of the unified DC bar. "We would oppose the tax proposals if they are discriminatory for the legal profession." (This is not the first time the legal community has banded together to protect its interest. In 1992-93, a 2 percent gross receipts tax surfaced and was later dropped.)Unlike the states, the District of Columbia is in a unique taxing situation, Lamm notes. The bulk of its tax base are businesses because the majority of the employees earn an income there, but live elsewhere. The district=s home rule does not allow an income tax on non-residents.
Funding sought in Ohio
Last year, Ohio faced a financial squeeze after the state Supreme Court ruled the method of funding education was unconstitutional. The legislature went back to the drawing board to devise a plan to extract money without relying on property taxes and its inherent discrimination between rich and poor districts.
The Senate Democratic Caucus proposed an expansion of the state's sales tax to include professional services such as legal and accounting. While other states have proposed an across-the-board tax, Ohio's ranged from 5 1/2 to 6 1/2 percent, depending on the area of the state.
The Ohio State Bar Association's Board of Governors opposed the tax proposal last September, with bar President Thomas Taggart testifying before the Senate Finance and Financial Institutions Committee."President Taggart testified that such a tax is on the misery and misfortune of an individual who needs legal services at a time when they are the most vulnerable and have a problem. It's an inappropriate tax and not in the best interest of Ohio citizens," says William Weisenberg of Columbus, director of government affairs for the Ohio bar.
A professional service tax was proposed, yet defeated, in 1983.
Threat in Vermont
Like Ohio, when the Vermont Supreme Court ruled that the use of property taxes to fund education was unconstitutional, the state legislature was forced to find $60 million and it proposed extending the 5 percent sales tax to professional services such as legal services, engineering and consulting. While a draft bill never left the House tax writing committee, the governor's office proposed it again. It died in the Senate finance committee.
The death of those drafts wasn't as smooth as it sounds, however, says Robert Paolini of Montpelier, executive director of the Vermont Bar Association who served in the Vermont House of Representatives for four years. In fact, Paolini's priority was to defeat the new tax bills.
He encouraged local bars statewide to voice their opposition to their legislators as the bar sent mass mailings and included alerts on its Web site. Bar leaders also wrote editorials that were published in local newspapers. Paolini testified twice before the Ways and Means Committee on behalf of the state bar.
"I sat for three weeks straight in the Senate and couldn't wait for that gavel to drop," Paolini recalls when the session ended and the legal services tax proposal disappeared.Target in Maine
When the Maine Municipal Association, which represents municipalities statewide, proposed a comprehensive tax package last year to reduce the property tax burden, lawyers took notice because they were targeted for a 6 percent tax on legal services. In fact, every professional service, except medical, was included.
However, testimony by then-President David Whittier of the Maine State Bar Association and a packed hearing room before a joint legislative committee dampened any support for the bill, according to current bar President Linda Smith Dyer of Augusta. A similar bill failed about six years ago.
As in other states, the tax would cause consumers to pay more for legal services and impose administrative burdens on lawyers. However, another issue arose--portability.
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The state also didn't want to tax a service that someone could provide tax free just over the border," Dyer says. In other words, consumers might look elsewhere for tax-free legal assistance, which would leave Maine lawyers with less business. Or Maine lawyers might begin moving their offices across the border just to remain competitive, she explains.Professions unite
Professional services were also targeted in Maryland last year and lawyers, doctors and accountants found themselves relying on each other to fight the proposed tax.
In February 1997, a proposal called for levying a .04 percent tax after the first $15,000 in gross receipts were collected. The tax would not be added to client fees, which is the case in other states, but to the monthly gross receipts of the professionals, says Albert "Buz" Winchester of Annapolis, director of legislative relations and lobbyist for the Maryland State Bar Association.
"This was the first time a tax proposal in this form was introduced," says Winchester about the gross receipts. Association leaders for the lawyers, accountants and doctors testified against it before a House committee, and the measure was killed in March 1997.The tax on professional services is not expected to arise in Maryland this year for two reasons, Winchester notes. First the state's economy is stable. Second, this is an election year and candidates rarely seek tax increases.
--Anna Marie Kukec
Carolyn Lamm: "We realize that DC needs tax revenue, but lawyers should not be disproportionately impacted by these tax proposals."
