DC to Tax More Services
- Jun 3, 2014 | Gail Cole
Update, 9.3.2014: the 5.75% sales tax will be extended to additional services, effective October 1, 2014.
Under the recommendation of the DC Tax Revision Commission, the District of Columbia is preparing to expand sales tax to a number of services.
The commission was created in the fall of 2011 to come up with recommendations “designed to improve the District’s tax system and help its residents and businesses prosper.” The recommendations, unanimously approved in December 2013, were published recently in the commission’s final report.
The following recommendations were made with respect to sales tax:
- Expand the sales tax to more services;
- Report use tax for online and mail-order purchases on the individual income tax return;
- Raise the general sales tax rate to 6% from 5.75%; and
- Unify taxation of tobacco products.
Last week, the DC Council passed a FY 2015 budget proposal that “funds the majority of the recommendations of the Tax Revision Commission, providing tax relief aimed at addressing disparities in personal income tax, the estate tax, business taxes, and sales tax.” According to a news release, the Council plans to phase in these recommendations over a period of five years.
The first step is the expansion of the District’s 5.75% sales tax to the following services, effective January 1, 2015 October 1, 2014:
- Bowling alleys and billiard parlors;
- Carpet and upholstery cleaning;
- Car washes;
- Health clubs and tanning studios;
- Home water consumption; and
- Storage of household goods/mini storage.
A tax on health clubs was considered four years ago but was dropped due to its unpopularity. People rallied to protest the yoga tax, as it became known. There was no time to protest it this year. According to the Washington Post, the proposal was made public less than 18 hours before the first vote.
DC Council Chairman Phil Mendelson (D) refuted the idea that the yoga tax is a surprise, noting that it “has been out in the public domain since the Tax Revision Commission issued its recommendations last December.”
“There are a lot of things you can tax that are not good for the body, so why tax yoga?” –Dustin Canter, head coach for a DC fitness tech firm.
Why would the District embrace taxing healthful behavior like yoga rather than extend sales tax to candy and junk food, another consideration.
The Commission decided not to recommend a snack tax on candy and potato chips because it wasn’t “worth the administrative challenges that it would create.” In addition, the services listed above were selected for two reasons:
- “They are typically a final purchase by consumers; and
- They are services linked to tangible goods or real property in the District, making them difficult for consumers to purchase online or in another state.”
Given the size and location of the nation’s capital, a spending shift to neighboring Virginia and Maryland is a real concern. For this reason, the commission did not recommend extending sales tax to professional services such as accounting, legal advice and dental work, which are exempt in Maryland and Virginia. “Professional services are a large portion of the District’s tax base,” according to the commission’s final report, and “there are questions about whether taxing them would harm economic activity in the District.”
Presumably, capital residents will continue to frequent their favorite bowling alleys and billiard parlors. But it takes motivation to go to the gym. Some are worried that the addition of sales tax would be all it takes for people to stay home rather than go to that yoga class. Missouri lawmakers are considering exempting fitness classes such as yoga and CrossFit from sales tax for just that reason.
The yoga tax may not be the only unpopular tax; the tax on storage services may also be met with resistance. Faced with vocal opposition, Minnesota lawmakers repealed a tax on storage services this spring shortly before it was set to take effect.
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