Taxing Business Services

Report Outline
Special Focus

Overview

As the U.S. economy has shifted toward services, and as the role of federal assistance to state and local governments has diminished, the states increasingly are searching for long-term fiscal stability. As a result, many states have become very interested in the idea of applying the sales tax to most services. Florida this year became the fourth state, the first big one, actually to impose a broad-based tax on services. Texas may be the next.

Broad-based taxes on services are often not easy to enact, however. When the idea comes up in state capitals, notes Karen M. Benker, director of research for the National Association of State Budget Officers, “lobbyists tend to come out of the woodwork” to drive it away. A broad-based services tax affects “many, many different groups,” she said, “and many of those groups are well organized.” Their strong lobbying efforts are “usually successful in defeating the measure.”

They were not successful in Florida, however. Advertisers, lawyers and others were unable to prevent the enactment of the Florida services tax and now are fighting it in the courts, and in the court of public opinion. Beginning this July the existing 5 percent tax on goods was also applied to services—whether performed in Florida or elsewhere for use in the state. National advertising aimed at Floridians thus is subject to the tax.