Tax Analysts Blog

Lawyers Whining About Taxes

Posted on Jul 30, 2014

Republican Bruce Rauner is challenging Illinois Gov. Pat Quinn (D) in this fall's gubernatorial election. One of Rauner’s big ideas is tax reform. In a nutshell, he wants to cut personal income taxes, freeze property taxes, and expand the sales tax to cover 31 services -- including those provided by lawyers.

From the reaction of the Illinois State Bar Association, you would think that Rauner had committed a pretty big sin. It said Rauner’s proposal to impose sales tax on the services provided by attorneys would hurt clients and curtail access to justice! Blogs and social media are abuzz about Rauner’s chutzpah. In fact, in a touch of delicious irony, lawyers are criticizing Rauner for calling for income tax cuts while being a really rich guy! In any event, Rauner has made no friends among the lawyers who are prepared to fight his tax reform plan.

For the record, I don’t like taxes. But if you’re going to have a government, you should pay for it the right way. Sales tax should be paid by consumers on all their purchases. Business inputs should never be subject to sales tax. Everyone who has ever studied or even thought about consumption taxes knows that. So it makes sense that legal services should be taxed. Lawyers don’t like that because, well, people might use less of their services. That would be a tragedy beyond comprehension.

The vehement opposition to imposing sales tax on professional services is not new. Real estate agents frequently assert that taxing their services would destroy the American dream of homeownership. Tales of woe have been told by architects, funeral directors, and accountants. Professional services are generally never subject to sales tax. That is not because the professionals are right in their arguments, but because they are powerful political forces. Nonprofessionals like tattoo artists and ear piercers don’t have the same kind of clout -- their services get taxed.

A few years back, the governor of Minnesota proposed taxing legal services. The Minnesota bar sprung into action, claiming that such a tax would essentially destroy the foundations of American democracy. Basically, the lawyers argued that the sales tax would do what Hitler, Stalin, Mao, and bin Laden could not. But the lawyers in Minnesota, like the lawyers in Illinois, are all about protecting their economic interests. I understand that, but as a society we should reject the special treatment of professionals for tax purposes. Rauner is right. Legal fees, like all consumption, should be subject to sales tax.

Read Comments (8)

edmund dantesJul 29, 2014

So, how does that work with contingent legal fees? And those fees are *not*
deductible for federal income tax purposes, correct? Total sales tax in
Illinois can reach 9.75%, depending upon locality.

So, my attorney wins me $100,000, he takes 1/3, I pay $9,750 in sales taxes.
Then I include the full $100,000 on my federal and state income taxes. That
could easily run to a $40,000 liability. I'd be lucky to have $20,000 at the
end of the process.

Yeah, I can see how this change would be bad for for the legal business.

david brunoriJul 29, 2014

Edmund Dantes,

That is an excellent question. And it is a question I have never pondered. I
will do so. I suspect that the sales tax would have to be imposed on the
contingency fee. But aren't most civil awards exempt from income tax (unless
they are for lost wages or profits)? If true, the bite may not be as big as you
think. But someo people smarter than me must have thought about this. I am
going to find out.

The VAT BastardJul 30, 2014

A smartly designed consumption tax reaches both goods AND services. There is no
policy based rationale for zero-rating the professional services of attorneys,
doctors, or architects ... as there is, say, for zero-rating exports under a
destination-based GST or VAT (in which case the country of import applies it's
own consumption tax rules).

The Retail Sales Taxes (RSTs) that litter the American landscape are a failure
on multiple counts. As David correctly points out, they don't exclude business
inputs. That in itself is horrendous. I will not shed a tear when we eventually
replace our archaic RSTs with a superior revenue tool that is better suited to
this century.

BTW - if you're wondering what portion of attorneys fees should be subject to
consumption taxation, look no further than how other countries treat
professional service fees under their GST or VAT regime. The measure is 'value
added' by the service provider. Accordingly, whether a given amount is subject
to income taxation is irrelevant. Value-added is conceptually distinct from the
accrual of economic income. Income is not a proxy for value-added. Apples and
oranges. But good question.

For the rest of Planet Earth the inclusion of professional services in the
consumption tax base is a no-brainer. Like the metric system, we are basically
the only industrialized populace perplexed this issue.

vivian darkbloomJul 30, 2014

Mr. Brunori is being a little bit inconsistent here in his argument. He
correctly indicates that to some extent (what extent?) the imposition of a
sales tax on legal services would reduce consumption of those services. But,
Mr. Brunori should have stated the following more clearly: Fundamentally,
despite any indirect effects, a sales tax on legal services is a tax on the
*consumer*, not on lawyers. That is why he's placing the wrong emphasis here:

"I understand that, but as a society we should reject the special treatment of
professionals for tax purposes."

"Society", through its legislatures, seems to be ordering "special treatments"
not for professions, but for their own ordering of priorities as regards
preferred consumption.

Apropos VAT, that Bastard is right: The EU practice is to tax legal services.
But, that's not at all a tax on lawyers. At the same time, the EU exempts
*medical* services: Article 13A(1)(c) of the 6th VAT Directive exempts ‘the
provision of medical care in the exercise of the medical and paramedical
professions as defined by the member state concerned’. It is also common among
EU Member States to exempt or provide lower VAT rates on items such as food and

The lawyers are, I think, right about the framing of the issue (presumably
without the hyperbole regarding Stalin, Hitler, etc). The issue is whether
legal services are, like medical services, something that *society* wishes to
have access to, unburdened by consumption taxes. Reasonable people can differ
regarding these priorities. And, as Brunori and the EU demonstrate, they do!

vivian darkbloomJul 30, 2014

Another thought:

It is not clear to me that Mr. Brunori would exempt a sales tax on legal
services provided to a criminal defendant; however, he has made no exception
for this presumably undue benefit to criminal defense attorneys.

Of course, the Sixth Amendment provides that in criminal cases "the accused
shall enjoy...the right to have the assistance of counsel for his defense".
The Supreme Court has expanded this to the states via the 14th Amendment. (the
Sixth Amendment predates Stalin and Hitler, but I hasten to add that there was
no such provision in their schemes of things).

I would find that taxing criminal defense services a rather odd way to further
the protection of this "right".
I suspect the Supreme Court might agree even though Mr. Brunori may not.

david brunoriJul 30, 2014

Viv, You are parsing too much! Of course I know that the tax falls on the
consumer -- which is why it should be imposed. But taxing legal services will
make them more expensive and could/would lead to less purchases of legal

My apologies for the Hitler hyperbole -- it was in response to non Hitler

I am not sure I would exempt criminal defense attorneys from sales tax, despite
the 6th Amendment. But honestly, I have not thought about it. I will do so
though. It is actually a very good point.

edmund dantesJul 31, 2014

Pain and suffering awards are exempt from income tax, I believe, as are medical
reimbursements. But I expect that many, if not most, awards include an
economic component that would be taxable. And I imagine that the IRS
presumption is that an award is entirely economic and the burden is on the
taxpayer to prove otherwise.

emsig beobachterAug 1, 2014

Perhaps it is a good idea for a reduction in the consumption of legal services.
It could pave the way for more comprehensive insurance policies. No fault
everything! However, we'd have to make AIG and some other insurance and
re-insurance firm "too big to fail."

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