January 15, 2020

In their perennial search for new revenue sources, governors and state legislators often propose taxing professional services.

These are services provided by veterinarians, physicians, architects, attorneys, engineers—basically anyone requiring special certification, education, and licensing to practice in a state. Just four states currently tax veterinary services—Hawaii, Kentucky, New Mexico, and South Dakota—but not for a lack of trying.

“For us, it typically comes up during the budget cycle,” said Jack Advent, executive director of the Ohio VMA, about legislative proposals to tax professional services. “It didn’t come up at all in our last budget cycle, but it did during each of the previous three.”

Reasons for opposing a service tax vary. One argument is such taxes are regressive and would disproportionally impact low-income residents. Another is small businesses are less competitive against larger retailers that are better able to absorb the costs. The objection raised by veterinarians is the subsequent increase in the cost of veterinary services would ultimately harm animals.

“It is important to keep veterinary services tax-exempt in our state because Vermont has a very high cost of living relative to incomes,” explained Kathryn Finnie, executive director of the Vermont VMA. “If services are taxed, people may view veterinary care as discretionary, and the health of Vermont animals would suffer.”

From goods to services

The first state sales tax laws were enacted during the 1930s when the U.S. was primarily a manufacturing economy. States started collecting taxes on sales of tangible goods, such as food and houses, but exempted fees charged for professional services.

Then, during the 1960s, the services portion of the economy began to expand and continued to grow to a point where it now contributes almost half of the nation’s GDP, according to the federal Bureau of Economic Analysis.

Five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—impose no general, statewide sales tax on either goods or services. 

Given the shift from a manufacturing to service-based economy, state officials often describe sales tax laws that exempt professional services as antiquated. In a 2017 budget message, former Oklahoma Gov. Mary Fallin said, “The way we impose taxes and collect revenue no longer reflects the current economy, but an outdated system that has not changed much since its inception.”

Attempts to amend sales tax laws to reflect the new economic reality are rarely successful as they are met with strong opposition from coalitions comprising diverse professional organizations. The three times Ohio’s former governor attempted to tax professional services, the state VMA joined with organizations representing auto dealers, accountants, and lawyers to defeat the initiative each time.

“They loved us,” Advent recalled. “While we were certainly not the biggest organization in the coalition, they loved us because the average consumer holds veterinarians in high regard. And our message was simple: The governor wants to tax the health care of your pet.”

Even when legislators tried “cherry picking” a handful of services to tax, the coalition returned in force. “It’s like Benjamin Franklin said, ‘Either we hang together, or we hang separately.’ We understand that it may not be us today, but in a few more years it might be,” Advent said.

The fine print

No two states have the same tax laws, which can be so nuanced as to be confusing. For instance, some states exempt animal products from sales tax when purchased by a livestock producer or used in food animals. Last year, the Vermont VMA successfully advocated the passage of legislation clarifying a 50-year-old law exempting veterinary supplies from sales tax.

“The tax department wanted to strictly interpret the existing language to only allow exemptions for supplies for agricultural animals,” Finnie explained. “Passage of clarifying legislation was necessary to preserve our exemption, and veterinarians actively lobbied their legislators and testified in House and Senate committee hearings.”

The legislation that passed exempted veterinary supplies and pharmaceuticals, including vaccines, as well as durable medical equipment but not over-the-counter medicines. 

“At a time when the legislature was looking to find money under any rock, this was considered a big accomplishment for our members,” Finnie said.