Unfair, Unwieldy, Unwise, Unethical, and Unconstitutional

The prospect of a Michigan tax on services that extends beyond the 26 services already taxed to include legal services is a growing threat, with a group of business leaders actively pushing the idea, legislation already introduced, and the Governor endorsing a services tax. The State Bar has successfully lobbied in the past against taxing legal services, arguing that a tax on legal services is unfair, unwieldy, unethical, unconstitutional, and, ultimately, unsuccessful. The constitutional problems with a tax on legal services are magnified when legal services to businesses are excluded, as is the case with several of the current proposals. See HB 5527, 5528, and 5529. If you haven’t expressed concern about a tax on legal services to your legislator, now’s the time.  Here’s how to connect.  Here’s the State Bar’s position.

Here's a quick rundown of the arguments:

A tax on legal services is

Unfair – Most legal services are rendered in circumstances of crisis, stress, or misfortune. People who seek legal assistance in cases involving child support payments, child custody, divorce, death, domestic abuse, end-of-life decisions, or bankruptcy seek them out of necessity, not choice. For this reason, a tax on legal services is aptly labeled a  "misery tax". 

Unwieldy – Determining what fees and services would be subject to the tax and which records would or could be subject to audit would be an administrative nightmare. Among other reasons, attorneys often don't receive payment promptly from their clients, making it a potential administrative burden to reconcile payment with the tax obligation.  Administrative complications were one reason why the only two large states that have adopted such a tax – Florida and Massachusetts – repealed it shortly after it took effect.

Unethical – Collection of a sales tax on legal services could compromise client confidentiality, imposing the state’s tax collection apparatus into the attorney-client relationship. Law firms do pay taxes under the Michigan Business Tax.

Unwise – Individuals and businesses seek legal advice to ensure compliance with the law.  Such behavior should be encouraged, not taxed. Further, the tax could be counter-productive, causing clients to seek legal services outside Michigan for intellectual property, federal tax, estate planning, legal service, and encouraging law firms providing such services to relocate outside Michigan, or perform such services at satellite offices. Like medical services, legal services are not discretionary. Taxing legal services is taxing justice.

Unconstitutional – In addition to constitutional concerns about attorney-client privilege and the taxation of criminal defense, the proposal to exempt one class of clients (business) from taxation while imposing the tax on another class (individuals) raises serious constitutional issues.

Unsuccessful - Two states, Florida and Massachusetts, enacted sales taxes on services but repealed the measures when they proved to be administratively difficult and unpopular.  In the three small states that are said to have a tax on legal services, two also tax physician services and the thrid reports that the tax is not enforced because it is so difficult to calculate and collect.

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