Arizona bans sales tax on services

Voters in Arizona have overwhelmingly approved a constitutional amendment prohibiting state and local governments from taxing any service not subject to tax as of December 31, 2017. It also bans state and local governments from increasing existing taxes on services.

Arizona is the second state to ban the taxation of services. With the passage of Constitutional Amendment 4 in November 2016, voters in Missouri prohibited state and local lawmakers from imposing sales or use tax on any service or activity not subject to sales or use tax as of January 1, 2015.

The Arizona Association of Realtors (AAR) was the driving force behind Arizona Proposition 126. Citizens for Fair Tax Policy, a political action committee, headed the campaign with strong backing from the AAR and the National Association of Realtors. Arizona’s chapter of the American Institute of Architects also backed the measure, as did the Arizona Small Business Association.

Holly Mabery, chair of Citizens for Fair Tax Policy, said the ban will “protect consumers and small businesses from having to pay a new sales tax on everyday services like: childcare, doctor visits, home repairs, air conditioning and plumbing, and even funeral services.” It was a preemptive strike, as no such taxes were under serious consideration.

Opponents — including Arizona Governor Doug Ducey, Senator Steve Farley, and the Arizona chapter of Americans for Prosperity — took a different view. Sen. Farley asked, “Do they not need good roads, good fire and police protection, good schools to sell their houses?” And Arizona State University president Michael Crow worried that passage of Proposition 126 would “negatively impact Arizona’s public education system,” which is funded in part by sales tax revenue.

Services subject to tax

A few services are already subject to Arizona’s transaction privilege tax (TPT), including amusements, photography, publishing, telecommunications, and transportation services. Arizona lawmakers didn’t push to expand sales tax to more services when they could. However, many other states have broadened sales tax to include certain services.

Online streaming services such as Netflix are now subject to tax in Chicago, Florida, and Pennsylvania. Several cities in California also tax streaming services, and they’ll be subject to tax in Iowa and the Canadian province of Quebec starting January 1, 2019.

Fitness classes such as yoga and dance are taxed in approximately half of all states; indeed, a contentious tax on dance and other fitness classes in Missouri likely fueled the movement to ban other taxes on services. Sales tax in the District of Columbia applies to yoga and many other health club services. Somewhat confusingly, Tennessee taxes many charges associated with physical fitness, but not others. And in Washington, yoga classes may or may not be taxed, depending on where they’re held.

Cleaning services, landscaping services, parking, and repair services are also subject to tax in many states. More “white collar” services, such as accounting, legal, and medical services, are generally exempt.

It can be challenging to keep up with changing sales tax rates, rules, and regulations in multiple states. Automating sales tax compliance can help.