Sales tax on services in North Carolina is a bad idea

The idea of a sales tax on services in North Carolina has been rearing it's ugly head again lately, and while I can see why some people would support such an idea, I can't.

You see, I happen own a tiny service business that would be adversely affected by such a tax. My business is a one-man operation totally dependent on my labor. After expenses, whatever is left is my personal income, on which I pay taxes like any other citizen. A sales tax on my services would amount to double taxation of my earnings. That's not fair by anyone's standard, especially in light of the fact that so many huge corporations today (some of them my direct competitors) avoid paying their fair share of our collective tax burden.

A tax on services would hurt my business in several ways. For one thing, it would take up quite a bit of my time dealing with the paperwork involved; time I could be spending providing my service and as any business person will tell you, time is money.

Even if I have my accountant handle it for me, someone has to be paid for that extra work, meaning I have to choose between raising my rates, thus making my service less competitive, or taking a pay cut, which ultimately hurts my family and the North Carolina Dept. of Revenue. Less income means less taxes paid on my income, and less purchasing of good on which I would pay the existing sales tax, and that means fewer revenues for the state of North Carolina.

To a larger business with employees, these same issues will still exist, only they will be magnified several times, resulting in the potential loss of jobs as the repercussions reverberate through our already fragile economy. For a sole-proprietor like me it could even mean the difference between success or failure of my business. My company may not yet directly produce more than one job, but indirectly the purchases I make, both to operate my business and with the tiny profit I manage to earn from each job, contribute to the the jobs of many of my neighbors across the region.

A better way to raise revenues without putting jobs at risk would be to add a few more brackets to the upper end of our income tax scale. An additional percentage point added to any income above $1,000,000 and perhaps another for incomes over $10m would generate far more revenue for our state and have zero impact on job growth and retention.

North Carolina needs more revenue, but let's be smart about solving the problem.

Comments

Your title is incorrect

While we can all readily concede that not all services are likely to fit well into the sales tax structure and appreciate your self-interest in avoiding hassles in your own business, your post paints with far too broad a brush.

In fact, broadening the base of the sales tax is a widely accepted and recommended progressive revenue solution and an absolutely essential component of what we simply must do in North Carolina if we want to keep generating sufficent revenue to fund our public structures and systems in the context of a 21st Century economy.

For a comprehensive explanation from the experts read this comprehensive report put out by the NC Budget and Tax Center last year.

Hassles?

You make it sound like I'm just too lazy or greedy to bite the bullet for the greater good.

I'm barely getting by ($22k taxable last year) and you would have me either raise my prices, which must remain low for me to compete with my larger, better established competitors, or suck it up and further reduce my already meager income. Sorry, but that dog don't hunt.

Sure, bigger companies with fleets of trucks and armies of employees could probably absorb such a change in our tax structure, but I seriously doubt I could. The economic environment we now live in leaves many with no other options but to enter the marketplace as sole-proprietor tradesmen, and now it's a good idea to tack sales taxes onto our livelihoods? Really?

From where I'm standing at the lower end of the economic ladder I see an awful lot of fruit hanging in the upper branches of the revenue tree, but nobody seems to have the balls to climb up there and get it.

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"...the question is not whether we will be extremists, but what kind of extremists we will be."

Martin Luther King, Jr., Letter from Birmingham Jail

Services

If we're going to have a sales tax, and I see no way around it in the foreseeable future, it should extend to services. That said, the prospect of dealing with the bureaucracy of taxes is a formidable barrier in my view, the act of filing is itself a tax on individuals and businesses alike.

I consider myself to be a pretty smart guy and I say without a hint of embarrassment that I couldn't even begin to file my own tax returns. On those few occasions where I have tried to do it myself, the results have been disastrous.

This is one of the many reasons BlueNC doesn't take advertising. This website is a company and has to file corporate taxes. Each year at this time, I hire someone to make sure I don't run afoul of the Department of Revenue.

All that said, we need to find a way to pay for the government we want. Tax simplification should accompany any effort to change our state's tax policy.

Of course it'll never happen. The entire accounting profession and half the legal profession has a gigantic financial stake in perpetuating complexity.

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We are not amused.

On one hand

I see your point James, but I can't see where double taxing sole-proprietor service providers is a valid part of the solution. A better alternative, that I think we both agree on, would be to tax the upper echelons of personal income at a higher rate and do away with many of the ludicrous exemptions and loopholes like calling some income capital gains, to name one that easily comes to mind.

The link posted above offers many good ideas with sound reasoning behind them, but leaving the top income tax brackets in the $300k to $400k range is to me a milquetoast half measure. The difference between a few hundred thousand and a couple million is huge, and between a couple million and tens or hundreds even more gargantuan.
The revenue that could be raised by even a few percentage points at that stratospheric level of income would far outweigh what could be garnered from taxing tiny business owners like me out of existence.

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"...the question is not whether we will be extremists, but what kind of extremists we will be."

Martin Luther King, Jr., Letter from Birmingham Jail

Reporting burden

When I was collecting sales tax, the amount of taxes never bother me as much as the monthly reporting.

Broaden the base

It's not about more taxes, it's about smarter taxes. A little bit from many sources can be fairer and more stable than a lot from a few shrinking sources. Heavy dependence on income tax and sales tax at the state level means exponential revenue swings when the economy changes. We could plan state spending better and weather the economic downturns better if the drop in revenue was not so precipitous from the flush good times when spending gets a little giddy. Broadening the base would flatten out the crests and valleys. We could lower rates and even lower overall taxes with a more dependable revenue stream.

Okay

After reading through the entire document RSchofield posted above, it appears that most of my transactions would be exempt as 80% to 90% of my work is business-to-business, however, I still think we need a few more brackets it the top of the income scale.

I recently purchased some equipment for my business and since the company is in SC and TN, I didn't have to pay sales taxes. How do thee states get by without sales tax revenue at all?

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"...the question is not whether we will be extremists, but what kind of extremists we will be."

Martin Luther King, Jr., Letter from Birmingham Jail

Use Tax

TN actually has a higher sales tax than NC. When you make an out of state purchases from a vendor that has no physical location in NC you're supposed to pay a Use Tax to NC DOR.

If you paid another state's sales or use tax on the out-of-state purchases, credit for the tax paid is allowed against the North Carolina use tax due.

This is self reported, and often not. For many this applies to Amazon and Ebay purchases. It's a hole in our revenue that's getting bigger and placing a bigger burden on bricks-and-mortar retailers. At a minimum the base should be broadened to include online purchases. Last year Amazon had four registered lobbyists from McGuire Woods working against this. Different states are dealing with this differently.

I knew about the Amazon problem

Thanks for the info.

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"...the question is not whether we will be extremists, but what kind of extremists we will be."

Martin Luther King, Jr., Letter from Birmingham Jail

Thanks for listening

This is complicated stuff and we all have much to learn. Again, I sincerely urge everyone to follow the excellent stuff put out by the folks at the N.C. Budget and Tax Center (who work down the hall from us here at Policy Watch). North Carolina is incredibly lucky to have its own team of independent, super-smart and progressive budget geeks. Their reports are almost invariably on the money.

Double-taxation baloney

Sorry, but the argument about "double-taxation" is bogus. The tax is on top of your rates. Should you decide to not raise your rates in fear of losing customers, that is your choice. Besides, do you really think your larger competitors are willing to take a 7% hit on their revenue by rolling that tax into their current pricing scheme? No way - they'll simply add a new line to their invoices: State Tax 7% (or whatever the rate).

FYI - I am not in favor of taxing services - there are better ways to raise revenue.

The big hole

The big hole it seems to me is in the use tax on online purchases.

One other thing to remember, for most "services," NCDOR also has the "privilege tax." I don't know what service you provide, but this privilege tax is a surprise to many service providers. I am a licensed Professional Engineer, and pay the annual registration fee to the NC Board of Examiners for Engineers and Land Surveyors. But I am also required to pay the annual privilege tax to NCDOR. I'm certain that many engineers are not aware of this requirement, or ignore the requirement, especially if they don't live in NC but hold engineering licenses here and practice engineering in the state.

I have lobbied my representatives to roll the privilege license into the professional licensing fee, to reduce the paperwork burden on people like me. But I guess they have other fish to fry, like suppressing votes and gerrymandering districts and gutting the education system...

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The measure of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little. - FDR

Curiouser and curiouser

I'm not familiar with that particular tax either.

Fortunately, or not, my profession is not licensed, although I often wish it was, if only to weed out the amateurs.

Thanks for bringing it up, I'll definitely have to look into it and make sure I'm in compliance.

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"...the question is not whether we will be extremists, but what kind of extremists we will be."

Martin Luther King, Jr., Letter from Birmingham Jail