Oakland County Bar Association - OCBA Opposes Tax on Legal Services

         Some of you may remember that in 2007, the lawmakers of this state introduced legislation (in order to raise revenue) that imposed a tax on services, and specifically, a tax on legal services. The leadership of your bar (which included testimony of past OCBA President John Schaefer at legislative hearings) in conjunction with the State Bar were successful in lobbying the defeat of this particular legislation. Unfortunately, however, revenues continue to fall and the state is unable to balance its budget or provide basic services to its citizens. As a result, the leaders of our state are on a “hunt” for money.

     One source of money would be a tax on legal services. Such a tax, however, would be a significant burden on the delivery of legal services to the public. It would also hamper lawyers in providing services to their clients, not to mention this proposed tax creates a host of policy, privilege, constitutional and cost issues. As part of this "hunt," the Legislature has once again introduced bills, including a plan by the governor, that impose a tax on legal services.

     A tax on legal services is wrong, especially as many of the plans' components are disingenuous in taxing legal services but not taxing other services or business consumers. Most importantly, a tax on legal services severely limits the public's access to the justice system. At present, there are only three states that have a tax on legal services. They are Hawaii, South Dakota, and New Mexico. Hawaii and New Mexico have such a broad base that physician services are also taxed. Ironically, South Dakota claims the tax cannot be collected because it is too difficult to calculate!

     We must also keep in mind that legal services are not discretionary, no more so than medical services. Reflect on it – do you know anyone who has an extra $200.00 who will spend it just to have the pleasure of talking to an attorney? People see attorneys because they have a problem, and lawyers, first and foremost, are problem solvers. That is why clients come to us for help.

     The majority of people who would pay this tax are dealing with family-related matters such as child support payments, child custody, domestic violence and personal protection orders. Does it make sense to tax single parents who are trying to obtain support payments to raise their children and in these tough economic times are burdened with additional cost just to seek help? A tax on legal services clearly interferes with the public's ability to seek and obtain justice and our ability as attorneys to protect the public.

     To elaborate further, given the fact these bills exempt business-to-business but not individually consumed services, assume the following: Suppose an individual decides to sue Toyota for a product defect. The individual who files the lawsuit would be taxed on the legal services, but Toyota would not. Unbelievable! Fortunately, we all attended law school the day they taught constitutional law and still remember well the Equal Protection Clause. I cannot think of a better situation that invokes the need for such protection.

     Because of these and many other concerns, the leaders of your bar association, in conjunction with the leaders of the State Bar, other local bars, and our lobbyist, are actively working to defeat these bills. This is no easy task as Michigan finds itself in a worse economic condition then the last time this tax was introduced. Your bar association will do all it can to keep these bills from becoming law, and ensure that the public will continue to have unfettered access to our justice system.

     In light of the seriousness of this issue, I would ask that you join in this task and take up the mantle of this cause personally.

I urge you to voice your opinion on the subject by doing the following:

1. Contact your state representative and/or senator with whom you have a relationship to voice your opposition to a tax on legal services. Feel free to use any or all of this e-mail message in your correspondence.

http://house.michigan.gov/find_a_rep.asp
http://senate.michigan.gov/SenatorInfo/find-your-senator.htm

2. E-mail as many of your peers who will do the same.

Unless we all weigh in and voice our vehement opposition to this misery tax, there will be nothing to stop our state’s legislators from including a tax on legal services in any “reform package.”

Overview of Proposals

There are four bills proposed by representative Mark Meadows: HB-5527, HB-5528, HB-5529 and HB-5890. Simply put, these bills include a 5 percent sales tax on legal services. This tax, however, does not apply to services provided to a business entity, to educational services, services provided by a non-profit organization and services provided by a physician. Additionally, HB-5810 was introduced by representative Alma Wheeler Smith on February 17 of this year. That bill also includes a 5.5 percent sales tax on legal services.

The governor's budget plan, which was presented by her office on February 11, 2010, also embodies a tax on legal services. This plan would extend the sales tax to services but exempt services for health care, social assistance, education, new construction, real estate and insurance, commissions and services related to business operations. If you wish to review the governor's budget plan, it can be accessed at www.michigan.gov/budget.

Last, but certainly not least, there is also the Business Leaders for Michigan/Turn Around Plan, which can be accessed at www.businessleadersformichigan.com. The Business Leaders plan supports a 5.5 percent sales tax that includes legal services but exempts business-to-business transactions, health care and other select services.

A tax on legal services, in particular, would negatively impact the public’s access to justice. The OCBA opposes the adoption of such taxation for this and for several other reasons:[1]

· A tax on legal services is a tax on citizens and businesses, (i.e., the clients), many of whom find it difficult enough paying for legal services for significant matters, such as divorces, wills and trusts, and others.

· People seek legal advice in order to be law abiding citizens. However, a tax on legal services would effectively discourage people from seeking such needed advice. Failure to seek legal advice at the appropriate time could potentially result in far more complex legal problems for individuals and businesses at later stages.

· A sales tax on legal services would deter individuals and businesses from taking proactive and responsible management measures, e.g., drawing a will, medical preferences, appointing guardians, and incorporating a business.

· Individuals and businesses secure legal services for the purpose of ascertaining, exercising, and defending their legal rights, including constitutionally protected rights such as the right to representation for criminal defense. However, a tax could pose serious financial barriers for people who need assistance.

· A tax on legal services would impose tremendous burdens on people and businesses that are already in the midst of significant financial and personal stress and misfortune, such as, foreclosure, domestic violence, divorce, child support, bankruptcy, debt collection.

· Most legal services are not discretionary. Consequently, those who would be unable to pay the additional expense associated with retaining counsel simply cannot defer legal services until funds are available.

· Legal services provide employment for Michigan citizens, but a tax could jeopardize employment and the income it brings to Michigan. That is, a tax on professional services would be detrimental to Michigan business interests, encouraging individuals and businesses to seek legal services out of state. Small business firms would be affected at a disproportionate rate than large businesses that employ in-house counsel that might not be subject to the tax.

· Many legal transactions, such as property transfers and estate administration, are already taxed. Imposing an additional tax on legal services would effectively result in a double taxation for these transactions.

· Audits of taxes on legal services could seriously invade attorney/client confidentiality.

Simply put, these taxes have not worked and have been revoked. In particular, the administrative and business difficulties experienced by Florida[2] and Massachusetts[3] in the wake of the passage of a tax on services that included legal services caused both states to repeal the tax.

[1] The OCBA is aligned with the State Bar of Michigan regarding its position against a tax on legal services. We agree with the State Bar’s Position Statement on a Tax on Legal Services and have adopted herein their points for consideration.

[2] Florida extended its sales tax to professional services, newspapers and advertising in July of 1987 and repealed it six months later in a special session of the Legislature.

[3] Massachusetts passed a tax on legal services, accountants, newspapers, and other services provided to business in July of 1990, and repealed it two days after it took effect in early 1991.

State Bar of Michigan Latest Facebook Posting on Tax on Services:

2/11/2010

Unfair, Unwieldy, Unwise, Unethical, and Unconstitutional

The prospect of a Michigan tax on services that extends beyond the 26 services already taxed to include legal services is a growing threat, with a group of business leaders actively pushing the idea, legislation already introduced, and the Governor endorsing a services tax. The State Bar has successfully lobbied in the past against taxing legal services, arguing that a tax on legal services is unfair, unwieldy, unethical, unconstitutional, and, ultimately, unsuccessful. The constitutional problems with a tax on legal services are magnified when legal services to businesses are excluded, as is the case with several of the current proposals. See HB 5527, 5528, and 5529. If you haven’t expressed concern about a tax on legal services to your legislator, now’s the time. Here’s how to connect. Here’s the State Bar’s position.

Here's a quick rundown of the arguments:

A tax on legal services is:

Unfair – Most legal services are rendered in circumstances of crisis, stress, or misfortune. People who seek legal assistance in cases involving child support payments, child custody, divorce, death, domestic abuse, end-of-life decisions, or bankruptcy seek them out of necessity, not choice. For this reason, a tax on legal services is aptly labeled a "misery tax".

Unwieldy – Determining what fees and services would be subject to the tax and which records would or could be subject to audit would be an administrative nightmare. Among other reasons, attorneys often don't receive payment promptly from their clients, making it a potential administrative burden to reconcile payment with the tax obligation. Administrative complications were one reason why the only two large states that have adopted such a tax – Florida and Massachusetts – repealed it shortly after it took effect.

Unethical – Collection of a sales tax on legal services could compromise client confidentiality, imposing the state’s tax collection apparatus into the attorney-client relationship. Law firms do pay taxes under the Michigan Business Tax.

Unwise – Individuals and businesses seek legal advice to ensure compliance with the law. Such behavior should be encouraged, not taxed. Further, the tax could be counter-productive, causing clients to seek legal services outside Michigan for intellectual property, federal tax, estate planning, legal service, and encouraging law firms providing such services to relocate outside Michigan, or perform such services at satellite offices. Like medical services, legal services are not discretionary. Taxing legal services is taxing justice.

Unconstitutional – In addition to constitutional concerns about attorney-client privilege and the taxation of criminal defense, the proposal to exempt one class of clients (business) from taxation while imposing the tax on another class (individuals) raises serious constitutional issues.

Unsuccessful - Two states, Florida and Massachusetts, enacted sales taxes on services but repealed the measures when they proved to be administratively difficult and unpopular. In the three small states that are said to have a tax on legal services, two also tax physician services and the thrid reports that the tax is not enforced because it is so difficult to calculate and collect.