Pushing back on legal services tax

Bar calls proposal 'a barrier to justice'

Gov. Mark Dayton and the DFL-controlled majorities in the legislature have promised to balance the state's $1.1 billion budget deficit with a two-pronged approach: spending cuts and "tax reform" that would increase the revenue coming in to the state's coffers.

Last week, bills that would expand the state's sales tax to include clothing priced at more than $200 and purchases made online were discussed in St. Paul.

It is no secret that a bill to tax legal services will also be introduced at some point this session, and the state bar association is already preparing to lobby against the proposal.  There is simply no variation or language of a bill that would tax legal services that the MSBA could support, said the bar's president Bob Enger.

"No proposal I have seen would [add a tax to legal services] fairly or realistically," he said. "The tax would end up becoming a barrier to justice put on people who can barely afford to access to the justice system right now."

This isn't the first time the idea has been considered in some variation, and there are a handful of states in the U.S. that tax legal services. Since 1987, only two states have enacted such a tax, but both quickly repealed it as opposition grew louder. During Gov. Jesse Ventura's term and Gov. Tim Pawlenty's second term in office, proposals were introduced.

Economists describe Minnesota's sales tax as "narrow" when compared to other states. Many goods and services are exempt. When compared to income and property tax, sales tax accounts for only about a quarter of total revenue collected -- well below the nationwide average. In addition to legal services, a sales tax would include all professional services such as accounting and financial planning.

Sen. Ron Latz, DFL-St. Louis Park, is chairman of the Senate Judiciary Committee. He is also an employment and criminal defense attorney. He said he favors expanding Minnesota's sales tax to purchases made over the Internet, but  he is skeptical of a tax on legal services.

"Where do you draw the line? That's the debate. We needed to broaden the base, but you want to have a level playing field for businesses in Minnesota and the rest of the country. If the rules exist, they should be fair for everybody," he said.

He is not sure how much momentum a tax on legal services would have among his fellow lawmakers or how likely it is the tax would be approved.

Under Ventura, the tax would have applied across the board to all legal and other professional services. In later years, business-to-business transactions were exempted. Some proposals sent the money collected to the state's general fund, while other ideas suggested putting the money in a silo to help fund the state's civil legal services.

The ideas died, but the phrase "tax on legal services" is still greeted like a bad ghost story in the conference rooms of large firms in the metro area and the break rooms of small firms in outstate Minnesota alike. In fact, it may be the one thing that scares lawyers the most -- from plaintiff's attorneys, to family law, to corporate and everywhere in between.

The reasons cited for the opposition run from altruistic to capitalistic.

They say a tax on legal services would hurt Minnesota businesses and put Minnesota attorneys at a competitive disadvantage in an increasingly global marketplace.

"Legal services are incredibly portable," said Rich Thomas, the legislative co-chairman of the Minnesota Defense Lawyers Association. "A tax here would increase the cost of business, and businesses need lawyers. If you put an extra 6.5 percent on top of a business's legal bill, that is 6.5 percent more incentive for them to use their in house staff and not hire me."

A tax in Minnesota would be great news for law firms in North Dakota, Wisconsin and Iowa, Thomas said.

A tax would also be hard to administer. Lawyers and nonlawyers are allowed to draft real estate documents, conduct closings and prepare tax returns. Would both groups be taxed or just one?  And what about cases that involve lawyers from Minnesota and those from out of state? How would the state collect sales tax from non Minnesota attorneys?

Attorneys argue that a tax on legal services wouldn't be paid by the attorneys but rather passed on to consumers in their legal bills.

If enacted, regular people would unfairly be hit with the burden, said Enger. Many consumers of legal services have to hire a lawyer through no fault of their own. They aren't getting sued for wrongdoing or being criminally prosecuted; rather, they need a lawyer to get a divorce, set up a will or because they were injured in a car crash. It is not a true consumption tax on a nonessential service. With a tax on their legal bills, people would either end up representing themselves in court or chose not to pursue the issue.  And if business-to-business transactions are excluded, the imbalance only gets worse, he said.

Enger said the idea plays well in the public because lawyers are an easy target when the state needs money. But the majority of attorneys don't earn nearly as much money as the general public thinks. For a small firm or solo attorney starting out soon after graduation with tens of thousands of dollars in debt, the tax could be a serious hardship -- especially if they have to chase down clients to promptly pay their bills or wind up paying the tax themselves.

"There is only so much blood you can squeeze out of the turnip," he said. "This just isn't the best avenue to cure Minnesota's financial problems.”

By Patrick Thornton

Source: The Minnesota Lawyer