1101 Market Street, 11th Floor • Philadelphia, PA 19107

Phone: 215-238-6300 •

February 27, 2004

Chancellor Testifies Against Legal Services Sales Tax

Chancellor Gabriel L.I. Bevilacqua has told the House Majority Policy Committee in Harrisburg that the Association opposes any effort to create a sales tax of any kind on legal services.
In written testimony, Bevilacqua tagged the proposed tax a "misery tax" and said it would fall most heavily on consumers and small businesses. The Chancellor said such a tax would also impose "an unfair burden on the justice system." His complete testimony follows:
On behalf of the Philadelphia Bar Association and its 13,000 members, thank you for allowing me the opportunity to submit this written testimony to the House Majority Policy Committee regarding the expansion of the Commonwealth's sales tax, in particular, how it relates to all professional services. The Philadelphia Bar Association opposes any legislation to impose a sales tax on legal services.
Legal services sales tax is not sound tax policy
Although the Philadelphia Bar Association is keenly aware of the budget crisis facing our Commonwealth and the need to reform our current property tax structure, a tax on legal services is not sound tax policy for maximizing revenues. A sales tax on legal services would unfairly tax persons when they are taking precautionary steps in managing their affairs. The imposition of a sales tax may deter responsible people from retaining lawyers at the outset, resulting in more costly legal problems and greater burdens on our judicial system.
A sales tax on legal services has often been called a "misery tax." It is a tax on necessary expenses and not on discretionary expenses. The Commonwealth has recognized the need to avoid taxing necessary items through the exemptions on the purchase of food and clothing. Many people who seek legal assistance do so out of necessity. For example, a spouse seeking child support; an injured worker seeking compensation; a person trying to protect his or her family through the drafting of a will. By far the most egregious would be a person forced to defend his or her legal rights in a criminal proceeding. In none of these cases is a person seeking legal services for discretionary purposes or for the mere fact that they want to hire an attorney.
Consumers and small business will be impacted
A sales tax on legal services will impact consumers and small businesses. A sales tax must be paid by the person who is purchasing the item or in this case the service. Sales taxes tend to be a more regressive form of a tax since the lower and middle classes are in many instances unable to afford an additional expense. With respect to businesses, many of the corporations serviced by lawyers are small businesses that cannot afford the additional burden of a sales tax on professional services. In a small business, the small businessperson must be cognizant of every dollar spent in order to grow as a company and to supplement the overall economic development of a region. An additional expense may impede many small businesses from growing or even beginning in the Commonwealth.
Many legal transactions are already taxed
Many of the legal transactions that occur are already taxed in some other form. An additional sales tax on the services performed would result in double taxation. For example, during a real estate settlement, the purchaser and the buyer already pay a transfer tax fee, an additional tax for services will only escalate the costs of buying or selling real estate. Also, a decedent's estate is taxed during the estate administration. The addition of a sales tax would only lessen the decedent's bequest that his or her estate has passed on in accordance with the instructions in an estate document.
Legal services tax could impinge upon the attorney-client relationship
One of the more sacrosanct relationships in our society is the relationship between an attorney and his or her client. All communications between a lawyer and his or her client are subject to strict confidentiality rules. The need for this confidentiality has long been supported through case law and other statutory changes. A sales tax on the legal services will create the need for the lawyer to create a sales tax account within the Department of Revenue thereby creating a need for the Department to review the account on a periodic basis. Typically, these accounts are audited by the Department to assure that all sales tax revenue is collected. To adequately perform its oversight function the Department may be forced to review billings and other documentation that will detail a client's case or subject matter.  Such an audit would violate the lawyer/client privilege that has been ardently defended during our judicial history.
In conclusion, the Philadelphia Bar Association opposes expanding a sales tax to professional services for the reasons set forth above. The imposition of the sales tax would be an unfair burden on the justice system. Thank you for taking the time to consider these comments.
# # #