Extending the Retail Sales Tax to Services in Washington State

The state retail sales tax applies to purchases of materials and property and to some services, including construction services, property rental, landscaping, and dating services. Many services are exempt, including professional services such as accounting and engineering; business services such as janitorial and advertising; and personal or consumer services, such as cable TV and beauty and barber services. Expanding retail sales taxes to include business services is highly controversial even though substantial revenue can be raised. This discussion brief outlines the revenue impact and issues involved in eliminating exemptions to the retail sales tax.

Summary

  • Most professional, business, and financial services and many consumer services are exempt from sales tax. The Department of Revenue estimates that extending retail sales tax to all services could raise $2 billion annually.
  • 5 categories of business and professional services (advertising, computer/data processing, misc. business services/consulting, legal, engineering/architectural) together could raise $714 million annually.
  • Retail sales tax has been added over the years to services performed on tangible personal property (such as auto repair), construction services, and some other selected services (such as landscape maintenance and tour operators).
  • Services are a growing sector of the economy.
  • Taxes on services are not generally progressive, but tend to be less regressive than general sales taxes.
  • Few states tax services, and attempts to impose new taxes on services have met with fierce resistance.
  • If implemented without other changes to Washington’s current B&O tax, taxes on professional and business services could result in tax pyramiding, and be detrimental to smaller businesses that rely on outside services.
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