TAX TALK

TAX ON LEGAL SERVICES
By Buz Winchester, MSBA Director of Legislative Relations

The credibility of this writer and the value of this publication will not be undermined by making the following prediction:  GENERAL ASSEMBLY SET TO PASS A TAX ON LEGAL SERVICES!!!!  No, that warning, tempting as it may be as a vehicle through which to mobilize MSBA members in order to launch a full scale grassroots assault on their senators and delegates, is not credible at this point in time.

            On the other hand, it would be a disservice to the members of the Association to ignore the prospect of legislation being introduced to impose a levy on a broad range of services, including those done by lawyers, in the 2003 legislative session.

            For years, talk of the need to pass a legal services tax has been dismissed because State revenues from other sources were sufficient to cover expenditures.  Good times and the debacle of the Florida tax on services in the late 1980’s kept that boogeyman in the closet for years.  Well those days are over.  Policy makers are scrambling to make up for insufficient income, and taxing lawyer fees is on the menu.  The likelihood of this legislation is palpable.

            There are dilemmas posed by this threat.  How does one warn, but not alarm?  How does one alert, but not incite screams of outrage?  How does one encourage MSBA members to communicate with legislators and the Governor without also creating a multitude of dialogues?  The danger here is that these discussions may provide officials new ideas about how to design effective, yet equally nefarious, ways to get their hands on some of the money generated by legal fees.  At this point in time, the best available solution is to view the 2003 session as a FIRE DRILL.

            The purpose of a fire drill is to prepare for the possibility of the real thing.  All of the participants in the exercise realize that the conflagration does not exist, but they go along with the fiction so that if the building begins to go up in flames, no one will get hurt.  Reaction time to the crisis shrinks, anxiety diminishes, and the chances of pandemonium are reduced.  If a fire actually occurs during the fire drill, and it is possible this has happened somewhere, everyone is saved.

            In the next few weeks, a bill or an amendment probably will be submitted to impose a tax on a broad range of services.  If such a proposal contains language instituting a tax on legal services, the MSBA membership and the local and specialty bars will be asked by this office to contact their elected State leaders and request them to oppose a levy of this sort.  Any and all forms of communication – Telephone, Fax, E Mail, Personal Visits – will be sought.  Marching down Rowe Boulevard on Monday nights with placards and torches will be discouraged at this point, but not entirely dismissed. 

The Maryland State Bar Association opposes any proposal to tax legal services based on the following:

1. Clients, not lawyers, would pay a tax on legal services.  A legal services tax is not a tax on lawyers, but a tax on those who seek legal advice.  Lawyers may pay the tax bill, but the taxes and the cost of administering the payments will be passed on to the clients in the form of higher bills.
    
2. A Maryland legal services tax would encourage clients, especially those with high legal bills, to seek legal advice in bordering states.
    
3. A legal services tax is a disincentive for citizens to seek legal advice.  The MSBA places a high value upon access to justice for all citizens.  A levy on legal services would hit low and moderate income taxpayers hardest, especially those who do not qualify for public assistance, yet cannot afford to devote a significant percentage of their income to pay for legal advice.
    
4. Many legal transactions, such as property transfers and administration of estates, require payment of taxes.  A legal services tax would impose an additional tax on the same transaction.
    
5. A legal services tax places an additional burden on those already experiencing financial problems.  Clients seeking legal advice on dissolution of marriage, bankruptcy, child support, debt collection and similar matters are those who can least afford to pay an additional charge.
    
6. An audit of client fund accounts in order to administer the tax would violate the attorney/client privilege.
    
7. The tax is regressive in that citizens and small businesses would bear a disproportionate burden for paying a legal services tax.  As many of the larger businesses retain attorneys as staff, they could avoid the tax, while moderate-income taxpayers and smaller business entities would have to pay the tax.
    
8. A legal services tax could be a tax on tax advice.  Many citizens seek advice from tax law specialists as a means of clarifying their tax obligations.  A tax on legal services, ironically, would impose an additional tax on those who are looking for ways to reduce their tax burden.
    
9. A key indicator of a state’s economic climate is its tax structure.  Passage of taxes on a wide range of services in other states, including legal services, in Florida and Massachusetts, has been a disaster.  Boycotts and threats of business relocations led to repeal of the statutes in both states. 
    
10. Taxing a person’s ability to defend himself or herself in a criminal proceeding could be challenged as unconstitutional.
     
11. As many legal services are provided to non-Maryland clients, or a mixture of in-state and out-of-state customers, deciding what services are eligible to be taxed would be an administrative nightmare and would probably be challenged in court.  This would result in added administrative and legal costs to the state.
     
12. Restricting the tax on legal services to “business-related activities” and excluding “personal legal services” would harm a vital center of the state’s economy and be aimed at the entities most likely to seek legal services from out-of-state firms.

If there are comments or questions on this article, please feel free to contact: Buz Winchester, Director of Legislative Relations.  Maryland State Bar Assoc., Inc., P.O. Box 49, Annapolis, MD  21204.  Phone:  410-269-6464 or 301-858-5353; FAX:  410-974-8244, E-Mail:  msba.legislate@verizon.net