Georgia looks at adding sales tax to services

Georgia looks at adding sales tax to services

March 14th, 2011 by Andy Johns in News

Georgia officials liken their tax structure to a sputtering jalopy - they say it needs an overhaul that allows a sales tax on services including auto repair, online dating services and dog grooming.

But Kim Stapp of Stapp Automotive in Ringgold, Ga., is afraid the state's tax tinkering might put the brakes on businesses like hers.

"Dollars are really tight right now for a lot of people," she said, taking a short break on a busy Friday afternoon. "Those few dollars may mean the difference between 'Go ahead and do it' and 'I can't do that right now.'"

Among its list of proposals, the state-sponsored Special Council on Tax Reform and Fairness for Georgians suggested putting a 4 percent tax on more than 50 services from septic system service to salons.

The group was created last year by the General Assembly to find a "revenue-neutral" way of shrinking income taxes and making the state more business-friendly by finding other revenue streams.

Georgia's residential income tax is 6 percent after certain exemptions.

The council's findings were given to the legislature's Joint Committee on Revenue Structure, which is expected to make changes and draft a bill to overhaul the tax code.

Last week, however, House Majority Leader Larry O'Neal, R-Bonaire, told the Atlanta Journal-Constitution the committee may put some of the recommendations on the 2012 general election ballot to let voters decide.

The council's final report, released earlier this year, suggests repealing many tax exemptions - including the one on groceries - and adding taxes on some services. Taxing services would bring in an estimated $247 million annually, according to the report.

The report warns that the state should not tax industries such as baby sitting, where the cost of enforcement would outweigh the revenues.

Dry cleaning, however, would be included, and business owner Emma Meal said that's bad news for her shop.

Meal owns H&L Cleaners in Rossville, and she said 60 percent or more of her clients visit her to avoid the tax in Tennessee.

"I would probably lose some of my Tennessee customers" if a tax were imposed, she said.

The Volunteer State has no income tax but does tax a specified list of services including dry cleaning, home and car repair and installations, pet grooming, health clubs, sporting events and uranium enrichment.

But even for her Georgia clients, Meal said, an additional 4 percent charge could slow things down.

"If customers have to start paying tax, of course it's going to cut into how much dry cleaning they do," she said.

For auto repair, a 7 percent tax on parts and a 4 percent tax on labor would create accounting issues, Stapp said.

"That adds another kink into your calculations," she said.

But the council said the changes are long overdue.

In their report, members say the current sales and use tax has "not kept pace with changes in the Georgia economy," citing the "growing importance of services" as a major factor.

The report cites statistics from the U.S. Department of Commerce Bureau of Economic Analysis that shows significant growth in services over the past 60 years. In 1947 consumers spent less than 40 percent of their money on services as opposed to products, but by 2007, the percentage spent on services had climbed to nearly 70 percent.

"With most services excluded from the sales tax base, Georgia's sales tax revenues have lagged relative to the overall economy," the report states. "Not taxing many services means that the tax base has become increasingly narrow, requiring a higher tax rate to obtain the same revenue."

The report mentions a federal list of 166 services that at least one state taxes and said Georgia now taxes only 36 of them.

"They've got to get the money somewhere," University of Alabama economist William Aldridge said of state agencies. "I can understand why they're looking there."

He said developed nations often follow a "natural progression" to become more and more productive. As time becomes more valuable, people essentially outsource tasks to service companies.

"Things have become so productive we don't have time for some of the basics," said Aldridge. "We don't spend all of our time making things for ourselves."

And while service firms including A-1 Handyman in Dalton, Ga., are happy to capitalize on the growing demand for services, many aren't crazy about the idea of collecting sales taxes.

"We already pay a great percentage of what we make out," said Greg Brown, operations manager at A-1, mentioning unemployment tax, insurance and other obligations. "If they keep upping the taxes, you're not going to have anything left."

On the other hand, Brown said, something that lowered his income tax would help his bottom line.

At the auto shop, Stapp said that might be the case for her as well, but she was skeptical that the state actually would cut the income tax.

"I'd have to see that in writing that they're going to raise one and lower another," she said. "I don't have a lot of confidence that they would cut back taxes on anything."