Sales tax on services: The next big thing?


Eben PeckAs small businesses, travel agencies have to deal with a lot of different tax issues: federal and state income taxes, payroll taxes, even hotel and gross receipts taxes in some states. And if some state politicians get their way, agencies are going to have a whole new tax nightmare to deal with: sales taxes on the services they provide to their clients.

Most states (45 plus the District of Columbia) have some kind of a sales tax, imposed on "tangible goods" (cars, clothing, electronics, etc.). Few states tax services (haircuts, car repair, lawyers, etc.). Economists and think tanks have long urged states to "broaden the base" of their sales tax by applying it to services, which would more accurately reflect most states' economies (once dominated by manufacturing but now primarily service-based). As states deal with budget crises or look to cut income taxes, taxing services becomes more attractive. Broadening the base also enables politicians to claim they are cutting tax rates at the same time they are raising more revenue. Since travel agencies are in the service sector, ASTA and its members are increasingly being drawn into these debates. Several states are currently active on this front, including:

• Virginia: Several bills were introduced in the General Assembly to apply the commonwealth's sales tax (5%) to services, including "travel services." Travel service businesses would have to pay the tax on their "gross sales," which would be devastating since so much of agency income is "flow-through" funds that legally belong to travel suppliers. Thankfully, none of the bills have so far advanced out of committee. 

• Minnesota: Gov. Mark Dayton's budget proposes to cut the state's sales tax to 5.5% but to apply it to services, including "travel agent services." The legislature has begun hearings on the governor's proposal and has until May to finalize a biennial budget.

• Ohio: Gov. John Kasich proposes to cut the state's sales tax to 5% but to apply it to a slew of exempt service sectors (unlike Minnesota, Ohio currently taxes some services). On top of the 5% would be the local "piggyback" sales taxes (up to 3%) that Ohio counties are authorized to impose. Included on the governor's list are "travel agent services." Legislative hearings have begun, and the Assembly has until June to finish its budget work.

• Louisiana: Gov. Bobby Jindal is proposing to eliminate state income taxes while raising the state sales tax and (reportedly) applying it to services. Further details will be forthcoming before the legislative session starts in April.

ASTA TAXABLE CHARTThere are a lot of unanswered questions about these proposals, especially in Minnesota and Ohio, where we have not seen legislative language. Would the tax be applied on agents' gross revenue or net revenue? Would it be applied on commissions? Would out-of-state agents selling to in-state customers be captured? Would travel agencies pay the tax, or would their clients? What we can confidently say is that taxing travel agent services will increase agents' cost of doing business, create a panoply of new administrative and accounting burdens and put those agents at a competitive disadvantage with businesses in states where travel services aren't taxed.

During these difficult economic times, when people are thinking more carefully than ever about how to spend their limited travel funds, agency profit margins are razor thin. According to ASTA's 2012 Member Profile Report, 36% of travel agencies either broke even or lost money in 2011. These are predominantly small businesses, with 98% of them meeting the U.S. Small Business Administration's definition of small business.

Furthermore, travel agents are different from other service providers that compete primarily against in-state businesses (landscaping, carpet installation, etc.). The typical agent competes not only with fellow in-state agents but against a wide range of out-of-state businesses, including brick-and-mortar agents, travel suppliers, travel management companies and online travel companies. These state proposals would tilt the playing field in favor of agents and companies that don't have to deal with the increased costs and administrative burdens these proposals entail.

Finally, subjecting travel agents to sales taxes would have impacts beyond our sector of the travel industry. Travel is a key driver of economic vitality, something that policymakers should want to encourage. Legislation targeting travel will not only send a profoundly anti-tourism message to the entire travel industry (and those who do business with it) but will act as a drag on state economic recovery. Any revenue increase from these proposals, we believe, would be more than offset by a sudden, sharp decline in tourism from within and outside the state.

Past state attempts to apply sales tax to services have proved highly controversial, and these proposals are no exception. States that have attempted to do so -- Florida (1987), Massachusetts (1990), Michigan (2007) and Maryland (2007) -- ended up repealing the broadly contested taxes either before the effective date or soon thereafter. Still, if certain states succeed this time around, and find the travel sector a lucrative piggy bank to tap, others are sure to follow.

In coordination with our local chapters, ASTA has launched aggressive grassroots campaigns in each state to oppose these proposals. We are asking our members to spend a minute or two and take advantage of our grassroots resources (available at to weigh in with their state legislators. To nonmembers, we ask that you join ASTA. If this isn't a good example of why our industry needs a strong and thriving trade association, I don't know what is. With the support of agents across the country, we will be able to continue the fight in state capitals and Washington and to keep our industry the thriving and dynamic part of the U.S. economy it is today.

Eben Peck is ASTA's vice president for government affairs. Contact him at [email protected].


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