New legislation introduces sales tax on services


SB 522 (Hertzberg) proposes a sales tax on services, and this is the fifth time in as many years that legislation has been introduced to impose such a tax. Last year, Senator Hertzberg introduced a bill that would have phased in a 3% sales tax on business-to-business services with a corresponding 2% decrease on the sales tax on goods (making the bill revenue neutral).

As was the case last year, there is already strong opposition to SB 522. The California Taxpayers Association released a statement noting the problems associated with implementing a sales tax on services, such as:

  • Increasing the competitive disadvantage faced by California businesses, by increasing the cost to produce goods and services in this state;
  • Creating competitive disadvantages between in-state businesses that can afford to hire employees to perform services and smaller businesses that contract out for services; and
  • Tax pyramiding, which occurs when taxes are imposed on various stages of production of an item, and also when the item ultimately is sold to a consumer. This increases overall production costs, which are passed on to consumers, and also reduces tax transparency.

We will continue to report on any updates regarding this bill and others in Spidell’s California Taxletter®.

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