Bar opposed to Ventura’s plan to tax legal services

Listen to this article

The Minnesota bar is gearing up to oppose Gov. Jesse Ventura’s efforts to impose a tax on legal services.

At his State of the State speech in early January, Ventura proposed a major reshaping of Minnesota’s sales tax structure. The tax would be lowered from 6.5 percent to 6 percent, but would be broadened to include currently exempt professional services — including legal services.

Kent Gernander, president of the Minnesota State Bar Association (MSBA), said that Ventura’s plan to place a levy on professional services “would tax people at times of misfortune and vulnerability — when they are least able to afford that burden — and would unfairly tax those who use legal services not from choice but from necessity.”

Minneapolis attorney Joel Carlson, chief lobbyist for the Minnesota Trial Lawyers Association (MTLA), described the tax as “a state-imposed hardship added to what is already a difficult situation.”

The MSBA Board of Governors has adopted a resolution opposing the governor’s tax proposal. The MTLA has been contacting legislators to voice its concerns about the tax and is working with a coalition that includes the MSBA, accountants and other professional service providers that would be affected by the proposed tax.

‘Inappropriate’ tax

Carlson described the proposed tax on “needed and necessary services” as “inappropriate.”

Attorneys in larger firms voiced their concerns that the sales tax on legal services would make Minnesota’s firms less competitive because legal services performed outside the state would not carry the sales tax. Attorneys in smaller firms or who practice in greater Minnesota expressed their concern that the tax on legal services would burden exactly those clients who could least afford to pay the tax.

The MSBA, MTLA, and other bar groups are encouraging attorneys across the state to educate themselves on the issue and make their opposition to the proposed tax plan known to Ventura and the state Legislature.

“Do not for a minute take this proposal lightly,” urged Carlson. “This is a serious proposal put forth by the governor that will not be dismissed out of hand. [As members of the bar,] you need to motivate yourselves to contact legislators to inform them of the negative aspects of this proposal.”

Carlson suggested that members of the legal community contact Larry Pogemiller, Minnesota Senate Tax Committee chair, and Ron Abrams, chair of Minnesota’s House Tax Committee.

Few states have

While the Minnesota Legislature has contemplated a sales tax on services three other times since the state enacted its sales tax in 1967, these proposals were made at times of budget shortages. In contrast, there is currently a huge anticipated budget surplus projected to be in the billions of dollars.

Gernander observed during past years the MSBA has expressed its opposition to all attempts to place a tax on legal services.

Only three states — South Dakota, New Mexico, and Hawaii — currently tax legal services. Proponents of the professional services tax argue that Minnesota should model its tax plan after those states.

Carlson said that comparing the fiscal positions of Minnesota and those states is like comparing apples and oranges.

“In South Dakota, [for example,] there is no corporate income tax and no individual income tax,” Carlson explained. “South Dakota’s sales tax on services is a main funding source for the state government. Minnesota, [which raises revenue through both corporate and individual income taxes], is not in that position.”

The situation in Hawaii differs from that of Minnesota because Hawaii, as an island state, has a relatively “captive audience,” Carlson said.

Gernander pointed out that two states — Florida and Massachusetts — enacted sales taxes on services, but repealed the measures soon after enactment when they proved to be unpopular and difficult to administer. Several other states, including Maine, Maryland, Michigan, Ohio and Vermont, have considered and defeated proposals to tax services in recent years — and almost all other states have rejected a tax on services, Gernander observed.

Gernander said that “this nearly universal rejection of taxing legal services suggests that the arguments against it are compelling.”

Carlson agreed: “There are some very solid, valid, and legitimate reasons why the [proposed tax on services] should not be adopted in Minnesota, and those reasons were also why other states that have considered such a tax rejected it,” he said.

Tax hurts consumers

Gernander said the MSBA broadly opposes a sales tax on professional services because the tax would negatively impact all service providers, not just those who provide legal services. Ventura’s statement that “lawyers and accountants should pay taxes like the rest of us” ignores the reality that a sales tax on professional services would be itemized separately and would be paid by clients, not by those providing the service, Gernander stated.

Gernander stated that the effects of the proposed tax would be borne disproportionately by individual consumers and small businesses because large corporations would not have to pay the tax on legal services provided by their in-house attorneys who are paid on salary.

According to Carlson, exempting certain types of services — such as family law or personal injury law — from the tax would not provide a solution to the inequalities created by the tax. Beyond the administrative problems involved in differentiating between different types of legal services, such a plan would be unfair to small businesses that lack the ability to hire in-house counsel.

Gernander said he is also concerned that the proposed tax would encourage Minnesotans to seek legal services from out-of-state providers when possible. The tax would also serve as an incentive for Minnesota service providers to move their services out of state, he added.

“It’s a business climate issue,” agreed Carlson. “The tax puts those lawyers that are located in Minnesota at a competitive disadvantage.”

Gernander pointed out that “a Minnesota business could obtain advice in many areas, such as intellectual property, federal taxes, or international business, from a lawyer in Chicago as readily as from one in Minnesota. Similarly, individuals could obtain estate planning or business advice from non-Minnesota lawyers via the Internet or other electronic communications.”

United in opposition

It is not only bar groups who are opposed to the tax. Practitioners themselves find the idea of a professional services tax to be unpalatable.

Daryle Uphoff, managing partner at the Minneapolis law firm of Lindquist & Vennum, voiced his concerns that the proposed tax would put Minnesota’s firms, especially those whose client base is largely corporate, at a competitive disadvantage.

“My primary concern is that [the tax on legal services] will make lawyers in Minnesota less competitive with those states that do not impose such a tax, for example Wisconsin and Illinois,” said Uphoff. “[The sales tax] makes it more burdensome for firms in Minnesota to
compete successfully for business or clients with firms in those states.”

Although Steve Schumeister, managing partner at the Minneapolis law firm of Robins, Kaplan, Miller & Ciresi, is also concerned that the tax would put Minnesota’s law firms at a competitive disadvantage, his primary objection to the proposed tax is that the tax would make the judicial system less accessible to the average citizen.

“We need to recognize the importance of access to the judicial system,” observed Schumeister. “[A sales tax on legal services] would increase the cost to individuals and limit access to the judicial system. I would not be surprised if this proposal is rejected.”

Michael J. Ford, chair of the MSBA’s Outstate Practice Committee, said he is also opposed to the proposed professional services tax.

“[In greater Minnesota,] Gov. Ventura is held in generally high esteem and his efforts are generally applauded,” said Ford. “The governor came to St. Paul determined to think, and act, outside the box of conventional political thought and to a great degree he has been successful in doing so. It is therefore doubly surprising to see him embrace a new tax in the guise of reducing other taxes. This is a favored ploy of the tax and spend group which promises to reduce taxes overall if only the electorate will stomach just one more tax.”

Ford said that he is concerned that Ventura’s “efforts to substitute an increased sales tax for reduced property taxes will only result in a compromise in that the tax on services will stay with us while the lowered property tax will again rise. Tax reduction only lasts until the next legislative session. Tax increases stay with us forever.”

Ford also said it is ironic that the proposed tax on services comes at a time when Minnesota has collected too many taxes and has to return some money to taxpayers. He observed that the proposed tax would likely affect the average client in greater Minnesota differently than it would the average client in the Twin Cities.

“Most of the people that lawyers represent in outstate Minnesota are on limited budgets,” observed Ford. “The tax on the services provided to them will not be absorbed into a corporate budget, but will rather be paid, [for example], out of the retirement funds of moms and dads that want to pass their estate to their survivors. This is a tax on the husband and wife who seek lawyers to get them through a difficult and painful divorce where there is never enough money to go around to begin with. This tax will come out of the funds that could have been used for child support or spousal maintenance. This is a tax on the family farm that is now being sold to pay off debts, or to fund the retirement of the farmer who is now getting out of our desperate farm economy. [The tax would be a real burden for] hard-working rural Minnesotans that have to pay for necessary legal services.”

Bemidji attorney Robert A. Woodke, chair of the MSBA’s General Practice, Solo and Small Firm Section, said that the section, which meets twice a year, has discussed the issue but has not yet expressed an official position with respect to the proposed tax. Nevertheless, Woodke said he is personally opposed to the tax, which he equates with a “tax on misery.”

“It’s an ill-considered legislative initiative that focuses on raising revenue [without considering the effect on] the citizen,” he said.

Woodke views the proposed tax on professional services as contrary to the state’s general tax plan which does not tax the necessities of life.

“We don’t tax clothing, food, or prescription drugs because those are necessities,” observed Woodke. “Almost any service that is rendered is based on need — not choice — and is therefore not an elective purchase. A person going to a doctor, dentist, plumber, or many other service providers faces the same issues [as a person who needs a lawyer’s services]. If someone has a bad tooth, their choice is to get it fixed or endure the pain. That’s not much of a choice.”

Leaving aside the business aspect of legal services, he continued, “most people who go to lawyers have a problem. I can’t speak for all outstate lawyers, but in my personal experience, people find the cost of legal services not prohibitive but also not cheap. [If the proposal is passed,] the cost to them will be increased by 6 percent. That, in effect, takes 6 percent away from a personal injury recovery, or adds 6 percent on to the cost of a divorce or bankruptcy. [The proposed tax on legal services] would tax the people least able to pay the tax.”

A lively debate

John Wodele, press liaison for the governor, said it is debatable whether legal services are “necessary.” Wodele compared the need for legal services to the need for a car. It is disputable whether that need is truly “necessary,” he said.

“Attorney services are a consumer item that is a large part of our economy — which is now largely service based,” Wodele stated. The governor’s proposed tax plan simply recognizes that taxing services would provide a necessary source of funds in our service-based economy, Wodele added.

Wodele predicted that the proposed tax on services will be heavily debated.

“It will be one of the more hotly contested issues,” Wodele said. “It will be a fun debate.”

Editor’s note: If you wish to register your input on the professional services tax, you can email Senate Tax Committee Chair Larry Pogemiller at sen.larry.pogemiller @senate.leg.state.mn.us and House Tax Committee Chair Ron Abrams at [email protected]