April 2002 

Tax the Lawyers!

by Jarvis C. Jones

“We don’t pay taxes. Only the little people pay taxes.”
— Leona Helmsley,
New York Times, July 12, 1989

In my February column, I mentioned that the bar association was forming a committee (A Team) to respond to the governor’s proposals to impose a 6.5 percent sales tax on legal services and to reduce the court’s budget, including legal aid funding, by 5 percent. While we didn’t get everything we wanted, I am happy to report back to the membership that the fallout from the governor’s budget proposal appears to have been kept to a minimum. As it stands now, the court’s budget would be reduced by less than 1 percent and there is also a specific bill provision that provides that legislative appropriations for legal aid services be reduced by no more than $175,000 (a two percent reduction). We also managed to escape having a sales tax imposed on legal services ... for this year. On behalf of the bar, I want to extend a special thanks to Wood Foster and his committee for their excellent work on the legal services tax issue and to Roger Stageberg and his committee for their excellent work on the court and legal aid services budget issues. We also owe a special debt of gratitude to MSBA lobbyist Lloyd Grooms and his firm Winthrop & Weinstine for the superb representation they always provide us over at the Legislature.

As Past-President Wood Foster succinctly put it, “The true litmus test for the MSBA on the legal services tax issue will be the next legislative session once we get past the Fall [2002] elections.” Recently, Lloyd Grooms and I spent an afternoon over at the Capitol talking to legislators about the bar’s concerns about the governor’s proposed legislation. While many of our legislative friends sounded a sympathetic note for our concerns, they were, at the same time, very candid in conveying to us that a proposed tax on legal services “next year” will have a much greater chance of success.

Over the last few months, I have spent a fair amount of time talking with lawyers and the Supreme Court about the governor’s proposal to tax legal services and reduce the budgets for the court system and legal aid services. Not surprisingly, an overwhelming number of lawyers strongly felt that a sales tax imposed on legal services was simply a bad idea. However, somewhat surprisingly, I did hear from a relatively small number of lawyers who expressed the sentiment that a tax on legal services “...was no big deal since we passed it on to the client” and that “we should not be so self-absorbed.” After listening to these comments from lawyers and hearing similar comments from some nonlawyers, it occurred to me that we, as lawyers, need to do a much better job of conveying to the governor, legislators, the public, and ourselves why a sales tax on legal services is simply bad public policy.

A good starting point for this discussion is to help interested and affected parties to understand that, contrary to the propaganda out there, the proposed sales tax on legal services is not directly or indirectly a tax on lawyers, but rather an additional tax burden imposed on individual clients. The sales tax proposed this year would have taxed only individuals. If the expense could have been deducted as a trade or business expense, the services would not have been taxed. While I know this is a very sensitive issue depending on a lawyer’s practice, it seems unfathomable that a sales tax for legal services would be paid only by individual clients, while corporate clients would go unscathed and exempted. The governor’s rationale: “The governor recognizes that imposing sales tax on business purchases results in pyramiding of sales tax and ultimately higher costs to consumers, and so is avoided in this proposal.”

While we must send a clear singular message that we are strongly opposed to all forms of sales taxes on legal services, I question whether taxing an attorney’s individual client base would be any less burdensome and costly to the consumer/client than taxing corporate clients. Many corporate clients have more financial levers at their disposal than individual clients to reduce, spread, and/or shift the impact of a sales tax. Under the governor’s current proposal, if an individual is sued by a corporation, the corporation would pay no sales tax for legal representation, while the individual client — who could be a laborer or farmer out in Farmington — would pay sales tax.

At minimum, a sales tax on legal services provided to individuals has the potential of creating a “chilling” effect on those clients who already can barely afford to purchase any legal services. In practice and reality, this type of tax will often serve as a hardship tax levied on individual clients during their most vulnerable hour. As lawyers, we should vigorously oppose any proposal that has the very real potential of further denying individuals the right to effective counsel, access to the courthouse, and their constitutional right to due process.

Contrary to the rhetoric, this type of tax is not remotely the same as a tobacco tax where you can, arguably, tell an individual, “If you don’t want to pay the tobacco tax, don’t smoke.” Individual clients (plaintiffs or defendants) dealing with such legal issues as family law, personal injury, estate and probate, employment, domestic abuse, housing, criminal charges, and bankruptcy should not be told, “if you don’t want to pay a sales taxes on legal services, don’t get sued or better yet become a corporation.” Unfortunately, the current sales tax proposal gives new meaning and credence to the misguided statement that “...only the little people pay taxes.”

JARVIS C. JONES is president of the Minnesota State Bar Association.