Legislation was introduced the first day of the new legislative session in December to impose a significant sales tax on services. While the legislation contains only intent language, meaning the real language is not yet in the bill, statements made by the author of the bill and information on his legislative website makes clear he intends to include architectural services in his bill. Indeed, architectural services is specifically mentioned in a Power Point presentation on his website.
Senate Bill 8, by State Senator Bob Hertzberg (D – Van Nuys), proposes to make significant changes to our tax law, including lowering the top personal income tax bracket, reduce or eliminate the corporate tax, and impose a state-only sales tax on most services. Health care and education would be exempt from this new sales tax, as well as services offered by small businesses, which are defined as earning less than $100,000 per year. The goal of these changes is to raise an additional $10 Billion a year in tax revenue to fund education, local government, and other needs.
Senator Hertzberg argues that our tax laws need to be changed to reflect our current economy. He states: “The underlying problem is, while California’s economy has evolved, its tax system failed to keep up with the times. Taxing only goods and not services when our economy has been so fundamentally transformed makes no sense and is manifestly unfair. This has to change.”
Additionally, Sen. Hertzberg is aware that some services he wishes to include in his legislation are exportable services, meaning they can be provided from a different state. These services, such as accounting, advertising, legal, architecture, and engineering, could respond to a sales tax by providing the services from out-of-state. Nevertheless, Sen. Hertzberg is still looking to include these services in his legislation.
The AIACC is a part of a large coalition that has met with Sen. Hertzberg to open dialogue with him and express our strong concerns. The coalition will actively lobby against this bill.
Some of our concerns with SB 8 are:
- The negative impact it will have on architectural jobs in California
- It creates an incentive for California developers to go outside of California for architectural services for a California project
- It would make California firms less competitive on out-of-state and overseas projects
- The tax would be higher on architectural firms due to the pass through nature of architecture
- When a client pays an architect $100,000 for design services, the tax is paid on that $100,000
- When the architect pays a structural engineer $10,000 for the structural design on that project, the tax is again paid on that $10,000
- The tax is paid again on every consultant the architect hires
- How does a small firm (less than $100,000) in revenue handle the otherwise positive situation if revenue unexpectedly surpasses $100,000?
- Is the architect expected to go back to the client and collect the sales tax?
- Is the architect expected to pay the sales tax out of his or her pocket?
Here is more information on SB 8 from Sen. Hertzberg’s legislative website.
The AIACC will continue to communicate with you this year on the status of SB 8.