Why is it so hard to tax services?

Over the course of years, we’ve written extensively about the problems with state tax systems, and proposed a number of “solutions.” At or near the top of the list of approaches we’ve recommended has been to expand on the number of services that should be taxed. After all, the logic goes, many of the states’ economies have shifted from those based on manufacturing to those based on the provision of services. And yet a whole host of business activities — like funeral services, home repair and personal care — have tended to escape the taxman’s net in many places.

And yet, actions to extend sales taxes to many new services have been stifled in state after state according to an excellent article in the Pew Charitable Trusts’ Stateline, by Elaine Povitch. (Thanks to Kil Huh, of Pew, for pointing out this piece via Twitter).

Povitch points, for example, to an effort in Oklahoma to tax more services, writing that the proposal “immediately ran into trouble both from anti-tax legislators who predominate in the conservative state, and service industries that could have been affected. The funeral home industry called the proposal a ‘death tax’ and argued that families already burdened with thousands of dollars of funeral expenses didn’t need a sales tax bill on top.

Stateline: “Democratic Gov. Jim Justice of West Virginia delivers his State of the State speech in January, in which he stressed the need to expand sales taxes to services. In the nearly two dozen states, including West Virginia, where proposals to extend sales taxes have been debated, none has passed.” © The Associated Press

“‘Should I smoke? I am going to pay a price. They’re going to tax me more. But I still have a choice of not smoking,’ funeral home owner Jerry Dillon told a Tulsa, Oklahoma, ABC affiliate in February. ‘But death is gonna happen. Let’s not take advantage of a grieving family at the worst times of their family’s life.'”

Povitch’s article goes on to demonstrate that problems continue to exist even in states that have been able to get expanded service-based sales taxes.

She writes, “Since North Carolina began implementing a tax on some services this year, which was enacted in 2016, the Department of Revenue has been flooded with questions about what is taxable and what is not. There have also been inquiries about how to collect and remit taxes from businesses that have never had to worry about it before, according to Schorr Johnson, public affairs director for the department. ‘People are looking for guidance, especially in clarifying the definitions … about what is and what is not taxable,’ he said.”

We strongly recommend you read the full piece, which you can find by clicking here.