Should services be taxed? And if so, which services? Lawmakers wrestled with those questions during a House Tax Committee hearing for a bill that would tax services like haircuts, tattoos, and gym memberships. Professional services like legal services and accounting would continue to be exempt.
Rep. Dan Hawkins helped draft the legislation. He said politics makes it difficult to tax professional services.
“The reality is we would face a pretty big headache going after those,” the Wichita Republican said.
Broaden the Base
The goal of the legislation is to broaden the tax base, Hawkins explained. Currently, Kansas sales taxes exemptions are about equal to the state’s general fund revenues.
Rep. Kristey Williams, an Augusta Republican, assisted with the legislation and testified before the committee.
“This is a sales tax that evens the playing field,” she said. “If I am in retail sales, and I have a storefront, I am charging sales tax. What happens if I am giving someone a tattoo or dying someone’s hair? I am providing a good, but I’m not paying sales tax.”
Few business owners testified before the committee, and Rep. Ken Corbet warned his colleagues that may be because they had limited notice to come to Topeka and oppose the bill.
“Most of the people who are on this list, probably had no idea their lives may be changing forever,” the Topeka Republican said. “I want to remind the committee that everyone who has a tax exemption–they didn’t come in and get them. They passed the House. They passed the Senate, and the Governor signed it.”
Ongoing Taxation Conversation
Williams said the legislation continues a conversation the House Committee started in January. Earlier this year, Scott Drenkard, an economist with the American Tax Foundation offered testimony in opposition of the state’s LLC-exemption.
“Tax reform is about broadening tax bases and lowering rates,” he said.
Williams said that is what the legislation would do–broaden the tax base, so legislators can eventually lower tax rates. Williams compared Kansas taxes to those of other states. Four states tax all services, and the surrounding states tax some services, but not others. There are items not included in the legislation that the committee could add, she explained. For example, veterinarian care for non-ag related animals, or pets, is taxed in some states. Storage space rentals are taxed in others.
“Some of these I’m not necessarily advocating, but I am listing them for us to think about,” she said. “…This is merely to keep the discussion going that was started several months ago. This started as a personal service look. What are those personal services that we choose to purchase and should they have some form of sales tax?”
Hawkins said legislators could remove parts of the legislation they don’t like.
“I would say if there’s something in (the bill) you think is unworthy, let’s take it out,” Hawkins said. “Let’s look at this as an opportunity to broaden the base. That’s really what we’re trying to do–get more revenue in support of state services.”
Dan Murray, a lobbyist for the National Federation of Independent Businesses, said sales tax collections force retailers to serve as agents of the state.
“We’re asking a new cohort of folks to serve as a state tax collector,” he said. “We stand up here and we will continue to fight for all retailers to retain a portion of the tax they collect for doing that.”
He also reminded legislators to consider the stacking of taxes. This legislative session, lawmakers discussed increasing income taxes, revoking an LLC-income tax exemption, increasing gas taxes by as much as 11 cents per gallon, and revoking sales tax exemptions for personal services.
“Most people who have small businesses, they pay more in property tax; they pay more tax on utilities that residential people don’t. Before long, you get to the point you’re no longer small business friendly,” Corbet said.
Only one small business owner testified before the committee. Bruce Williamson is a barber.
“Right now, when I figure up my taxes, I take out 33.5 percent of my income off the top. Because I’m a believer I take another 10 percent of that. I live off not a whole lot,” he said.
His barber shop doesn’t use a cash register.
“I have a bag that I make change out of,” he said. “We’re simple. If this was implemented, I would have to spend hundreds of dollars on a cash register for a sales tax which would be a tremendous burden on someone who just wants to make a living,” he said.
The Sunflower State faces a $280 million gap between projected revenues and expenditures this fiscal year. The legislation would bring in $21.5 million in additional revenue in 2018.
“It seems like it’s this way all the time. Every time we’re out of money, we always try to stir the water to get more money,” Corbet said. “It seems like it’s easier to keep taxing the taxpayer than it is to cut spending.”