California – State Could Cut Your High Sales Tax If It Taxed Business Services. Why That Won’t Happen—Yet

by Antoinette Siu
May 22, 2018

Consider these two scenarios: A family spends Saturday afternoon at the local shopping center, buying a new washing machine, summer sandals, children’s books and dog food. With every purchase, the state takes its cut, courtesy of California’s 7.25 percent sales tax.

Then consider a mid-sized advertising firm across town. It contracts with an accountant, a software developer, a lawyer and a cleaning service. Every time the company pays for these services, the state of California collects absolutely nothing.

But what if the state started getting a piece of that action?

Some state lawmakers are pushing that idea: Create a new business services tax they say would allow the state to cut California’s high sales tax to consumers and pull the state’s antiquated tax code into the 21st century.

A proposed bill would add a 3 percent tax to business services, and use the proceeds to lower by 2 percent the sales tax consumers pay at the cash register. In other words, it would be revenue neutral.

Still, that effort by Van Nuys Democratic Sen. Robert Hertzberg is a long shot for now. His bill has support from some of the state’s largest public employee unions—but more than 100 businesses and other groups oppose it. They label it a “job killer” that would trigger negative reverberations throughout California’s economy.

If California does eventually tax business services, some lawmakers next want to levy a service tax on consumers’ purchases too—car repairs, eye exams, massages, lawn services, yoga classes, haircutters and hundreds more.

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