Taxing Justice?

Listen to this article

With the state facing a multi-billion dollar budget deficit, one of the potential solutions could be a sales tax on legal services in the state.

According to State Bar of Wisconsin government relations coordinator Cale Battles, the idea of ending sales tax exemptions for some service providers, including attorneys, is being considered by state officials to help combat a projected $5.4 billion shortfall heading into the next biennium budget.

A 5 percent sales tax on legal services could generate close to $120 million in state revenue annually, based on a 2006 Wisconsin Department of Revenue (DOR) report.

“You go down the line of things which are tax exempt and when you get to attorneys, people may say, hey, that sounds great to tax the lawyers,” Battles said during a recent presentation to the Board of Governors. “They make a lot of money and drive nice cars.”

But bar leaders were quick to point out that any imposed sales tax on legal services would be shouldered by clients and not attorneys.

Sen. Robert Jauch, D-Poplar, is one legislator who said exploring the possibility of removing tax exemptions on some service providers is an attractive alternative to simply raising taxes.

“In the end, there needs to be an evaluation of them all and, at the very least, legal services should be on the table with other services,” said Jauch, who chairs the Senate Committee on Tax Fairness and Family Prosperity.

Client Concerns

At the Dec. 5 board meeting, State Bar Public Affairs Director Lisa Roys said attorneys should be thinking about the possibility of a proposal and what impact that might have on clients.

She also cautioned members of the legal community not to overreact, since there is only speculation that if the Legislature drafts a proposal to tax service industries, the legal profession will be included.

“Don’t just pick up the phone and start screaming at this stage in the game,” Roys said.

Still, several attorneys expressed concern as to what types of problems a proposal could create.

Gov. James R. Troupis said there may be ethical considerations as to how attorneys should contact clients about the issue, if necessary.

“Can we write to them and provide them that information and say, ‘Oh by the way, here is the letter we want you to send?’” Troupis said. “And can we do that without violating campaign finance laws, because of the problem of issue advocacy against particular legislators.”

Past-president Thomas J. Basting noted the likely “administrative nightmare” involved with trust accounts and how those funds would be taxed.

Battles said that three states — Hawaii, South Dakota and New Mexico — currently tax consumers for legal services. He added that Michigan, Florida and Massachusetts previously adopted similar rules, but they were later repealed because of administrative snags.

Nothing Drafted

Battles also stressed that there has not been any type of proposal drafted at this point, and discussion among state officials is broad as to what services might have tax exemptions lifted.

But he also said there is a good chance some type of proposal will be circulated in the coming months.

DOR spokesperson Jessica Iverson said that a number of options are being evaluated by Gov. Jim Doyle and state officials.

“I think it’s safe to say, given the severity of the budget situation, that everything is still on the table,” Iverson said.

Jauch said no professions have been “singled out” and he suggested some type of temporary “across the board surcharge” might be developed.

“Those in the legal profession are going to argue that this would be devastating to their profession,” Jauch said. “Rather than picking and choosing and arguing which service is more valuable than another, maybe there will be a suspension of tax exemptions for a limited period of time.”

Careful Approach

If a proposal to tax legal services in Wisconsin does develop, bar leaders said they plan to take a methodical approach to opposing it, so as not to give legislators or the public the wrong impression.

In a statement, State Bar President Diane S. Diel said a tax on legal services would put numerous clients at a disadvantage, including “the elderly addressing their personal and financial needs, young families buying their first home, and entrepreneurs incorporating a new business.”

During discussion at the board meeting, Gov. C. Michael Hausman said the bar needs to uniformly speak with the same voice in order to be heard.

“The bottom line is the only ones paying for this is the public, not us,” said Hausman.

He said attorneys can avoid perpetuating a possible negative image among some members of the public with unified opposition of any proposal.