California is already one of the toughest places in the country to run a small business, due to regulations, high taxes, high cost of living and a competitive employee market.
Imposing a new sales tax on services will hit businesses and consumers of all types but will fall hardest on small business owners. Unlike corporations, small businesses are not able to bring services like accounting, legal or design in-house to avoid the extra cost of the tax.
According to the report by the California Foundation for Commerce and Education (CFCE), imposing a 5% sales tax on services would unduly damage small businesses and put them at a further competitive disadvantage to large companies. Small businesses employ half the state’s workers and are a critical part of the state economy.
Small businesses rely on a myriad of professional services including accounting, legal, human resources, graphic design, marketing, communications, consulting and many more.
When business inputs like professional services are taxed, pyramiding compounds the cost of the tax up through the production chain. The CFCE report found that the effective tax rate of a 5% sales tax on business services in key economic sectors relied on by small businesses can range from 6.1% (construction) to 8.13% (finance) due to pyramiding.
These added costs and the competitive disadvantage caused by a sales tax on services could result in some small business closures or flight to other states.