Sales tax on California attorney services – How will attorneys react?

Originally posted December 1, 2011

The LA Times and New York Times report a possible ballot initiative this fall in California to, among other things, impose a sales tax on attorney services. It will be fascinating to observe how California law firms react if this tax is approved and imposed. Will they simply levy the tax without comment? Will they increase their fees to address the added firm administrative costs associated with the new tax? Or, will they absorb the tax to keep clients happy in these lean times? Perhaps they will lower rates to account for the additional tax to keep clients happy? Much depends upon the specifics and size of the proposed tax, and a particular firm’s client base.

Regardless, it seems a good marketing opportunity for law firms seeking a competitive advantage. The pitch: “We know these are tough times. The imposition of a sales tax on the valuable and necessary services we render for our clients will only make matters worse for our business clients struggling in a tough economy or facing the costs of litigation. So, effective upon imposition of the new tax, we will cut our rates in an amount commensurate with the sales tax. Thank you.”

The calculation is simple – accept a small percentage reduction in revenues in hopes of keeping existing clients happy, generating new clients and increasing market share. But, would this really work? And would it be fair? Should the attorneys and accountants bear the true burden of the proposed tax?

If this new sales tax is imposed, we will see how California law firms react. If it happens, it will certainly make for lively discussion in partner meetings across the state.