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02/26/2013

Tell state legislators you oppose sales tax on engineering and other services

ACEC Ohio members should contact their state legislators immediately to convey their opposition to the proposed extension of the state sales tax to engineering, architecture and most all other business and professional services.

 

BACKGROUND

On February 5 Governor John Kasich unveiled his state General Fund budget plan for FY 2014-15.  He proposed a host of major changes in Ohio's tax laws, including making engineering and nearly all other business and professional services subject to the state sales tax.

Formal language to enact the proposal is included in the state's biennial GRF budget bill, House Bill 59, which is now being considered in the Ohio General Assembly.

In documents detailing his proposal, the Governor said, "The inequitable structure of the sales tax, where the vast majority of goods are taxed but where only a minority of services are taxed, does not reflect the modern economy where services are almost two thirds of all consumption spending, and it distorts consumption decisions between goods and services."

As part of his plan, Kasich also proposes a reduction in the state income tax and a 50 percent deduction in net income that must be reported for state income tax purposes by owners of so-called "pass-through entities" (e.g., partners in partnerships, Subchapter S corporation owners, Limited Liability Company owners, sole proprietors and others who pay income tax on income that flows to them from a business entity).

Since the governor announced his plan, ACEC Ohio representatives have met with top officials at the Ohio Department of Taxation and with the governor's Director of Legislative Affairs to learn exactly how engineering companies would be affected by the tax and to convey the Council's concerns with the proposal.

In a joint letter to the governor delivered Friday, ACEC Ohio Executive Director Donald L. Mader and AIA Ohio Executive Vice President David W. Field said the sales tax proposal threatens to put Ohio engineering and architectural firms "at a severe competitive disadvantage to members of our professions located in other states."

ACEC Ohio will continue to work with other business and professional organizations to obtain relief from the sales tax proposal, but in order to succeed, state legislators must hear loud and clear from business owners in their home districts, also.

KEY ISSUES

While the sales tax would be due only if engineering services are "enjoyed" within the state of Ohio, it is legitimate to question the state's ability to collect the tax from out-of-state firms that come into Ohio to provide engineering services.

Of even greater concern, however, is that the sales tax would effectively be collected twice on all subconsultant services. Here's how that will happen.

Current Ohio sales tax law provides generally that if a product is purchased for resale, that purchase is exempt from the state sales tax.  However . . . .

The Department of Taxation takes a much different position when it comes to applying the sales tax to services, however, a limited number of which are already subject to the sales tax.

The Department of Taxation asserts that if a prime design firm employs subconsultants, it is the prime – not the project owner – who "enjoys" the benefit of the subconsultants' services.  Accordingly, the state would expect subconsultants to collect the sales tax from the prime designer.

When the prime invoices the project owner for a comprehensive package of design services, the prime will be required to again charge the sales tax, meaning the tax would be paid twice on the services of all subconsultants.

In such a scenario, even if the project owner is tax exempt, that project owner will end up paying the sales tax on those subconsultant services, if only in higher consultant overhead rates.

There are other troublesome aspects to this proposal, as well.

YOUR ACTION VITAL

If you believe having to collect sales tax on your services will adversely affect your business, you should immediately:

Please act today.  Most legislators have not yet gone on record as supporting or opposing the sales tax proposal, so your contact can be vital in helping them form their positions.

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