Maryland Bar Bulletin
Publications : Bar Bulletin : December 2007


 Legislative Preview:  
Taxation of Services

As the Special Session of 2007 began, professional organizations representing interests in the service sector of the Maryland economy were on alert, as the General Assembly began to consider, among other things, broadening Maryland’s sales and use tax to include additional services. The MSBA’s legislative attention, both prior to and during this special legislative session, was focused primarily on education of the legislative leadership in Annapolis, as to the negative impact that a tax on legal services would have on access to justice in Maryland. Secondarily, the MSBA advised the leadership concerning the complexities that have caused other states to reject taxation of legal services. The MSBA engaged in a cooperative effort with other statewide legal organizations, in providing briefing material to legislative leaders. It was important prior to a Special Session, where bills move swiftly, to explain quickly and clearly why taxation of legal services is problematic, and is qualitatively distinguishable from taxation of other services. Nationally, legal services are taxed in only three (3) states: Hawaii, New Mexico and South Dakota. Taxation of legal services measures enacted in Florida (1987) and Massachusetts (1990) were repealed before a single tax dollar could be collected. In both Florida and Massachusetts, the legislatures realized that the legal services taxation provision impaired access to justice and was awkward to administer.

By the time the legislature concluded their Special Session in the early morning hours of Monday, November 19, the General Assembly had combined savings measures in the form of budget cuts, expansion of the sales and use tax to include only computer services, and sales, income and other tax increases to solve, the State’s structural budget deficit. Additionally, the General Assembly authorized a voter referendum in 2008 on whether to allow slot machines gaming in Maryland.

Client Protection Fund

The one unfortunate outcome of the Special Session was an amendment added to Senate Bill 2 – The Tax Reform Act of 2007, by the Senate Budget and Taxation Committee. There was a belief within the Committee that lawyers are the only State-licensed professionals that are not required to certify to their licensing authority that they have paid all appropriate taxes. The Committee decided that the Client Protection Fund of Maryland (CPF) should bear that certification responsibility, and inserted the following language:

Before any annual fee required under this part is accepted from a lawyer and is deemed paid, the Fund shall verify through the Office of the Comptroller that the lawyer has paid all undisputed taxes and unemployment insurance contributions payable to the Comptroller or the Secretary of Labor, Licensing, and Regulation or that the lawyer has provided for payment in a manner satisfactory to the unit responsible for collection. [Business Occupations and Professions Article, Section 10-313]

The effective date of the amendment is July 1, 2008. The practical impact of the amendment, if left unaltered by the General Assembly in the 2008 Session, is that if the four-person staff of the Client Protection Fund cannot certify that all of the approximately 34,000 attorneys licensed in Maryland who are attempting to pay their annual assessment to CPF have paid all undisputed taxes they owe, and any unemployment insurance contributions that may apply to an attorney as an employer, the lawyer may not continue to practice in Maryland until compliance is verified by the CPF. While no one in the legal community takes issue with a requirement that lawyers pay taxes like all other citizens, the Client Protection Fund does not believe that it is the proper enforcement entity.

The Judiciary of Maryland and the MSBA informed the Committees that the Client Protection Fund has four (4) employees, and is not equipped to perform the function required by the amendment; however the House Ways & Means Committee and the full House of Delegates allowed the language to remain in the bill. Fortunately, during debate on this provision on the House floor, several attorney members of the House pointed out the flaw in the amendment. Delegate Sheila Hixson, who chairs the Ways & Means Committee, assured the members that although she would not endorse removing the language in the waning hours of the Special Session (a move that would require Senate concurrence, and possibly further extension of the Session), she would favorably respond to a bill to revisit the provision in the 2008 Regular Session. Delegate Kathleen Dumais (D) of Montgomery County, during House debate on the matter, stated her intention to introduce such legislation. The MSBA will be a key participant in the deliberations to determine the appropriate legislative remedy to the amendment to the Client Protection Fund statute.


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Publications : Bar Bulletin: December 2007