Service tax again being floated for lawyers -- beware!

Fran Spielman reports in this morning's Chicago Sun-Times that aldermen are looking for alternatives to property tax hikes proposed recently to help bail out underfunded Chicago employee pensions. Among the alternatives floated, according to Spielman's article, is a tax on certain professional services, such as legal fees. Among the proponents of this tax is Ald. Will Burns (4th):

Burns envisions a Chicago-only sales tax on services that would be considerably lower than the general sales tax and confined to “high-end” professional services like attorneys, accountants, lawn care and computer services.

“I would draw the line on services like haircuts and hairdressers. You want to avoid taxing everyday people. We have to keep the city affordable,” Burns said.

In larger firms, it would presumably be fairly easy to rewrite billing software to include the tax. Heck, even in a one-horse operation like my own, I have a calculator on my computer. I can figure out a 5% or 6% tax easily enough.

But that's just the beginning.

When (and if) the bill is paid, where does the tax money go? Can it be deposited in the firm account? We're lucky to get clients to write one check for fees; we can't possibly expect a fee check and tax check, too. Must every check be washed through an IOLTA account? For the anxious solo looking to cover the phone bill or the mollify the landlord, that extra delay could be problematic in the extreme.

Assuming that the fee checks still can be deposited in the firm account, hasn't the City just acquired some sort of right to access to our books and records, to make certain that we are levying and collecting the tax? What sort of ethical obligations would that trigger? What sort of documentation will be required to establish compliance to the City's satisfaction? And how often will we have to show compliance? Weekly? Monthly? Quarterly? Solo practitioners like myself will have to demonstrate compliance by ourselves. It would be just another unproductive task added to our workday.

And what if the fee bill isn't paid?

Even the silk-stocking firms have occasional issues with collections. Every solo I know has stories of sending out bills that they knew would never get paid. The tax would be payable only upon receipt, wouldn't it Ald. Burns?

And what about the client that "negotiates" his or her bill after the fact? That $2,000 bill? (Maybe it's $2,100 with the service tax.) I'll give you $750, and you should think it's Christmas, the client says. Maybe you get the client to eventually pay $1,000. The service tax would be payable pro rata, right Ald. Burns?

The City's pension shortfall is real. Money is going to have to be found somewhere. But a "service tax" on lawyers' fees is not going to be simple to implement or easy to collect. And there will be costs on the City's part for enforcement and regulation (someone is going to have to draft and, eventually, read the compliance forms, for example). The old expression, "the devil is in the details," seems particularly apt here. We don't yet know the details. Right now, though, I think that devil is grinning.