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Professional service taxes: bad for small businesses and consumers | COMMENTARY

Wendy Muher of Baltimore City, who has attended education funding rallies for nine years in a row, says education reform is needed now. She joined hundreds of supporters on Kirwan Day, to push for the Kirwan Commission education funding legislation.
Wendy Muher of Baltimore City, who has attended education funding rallies for nine years in a row, says education reform is needed now. She joined hundreds of supporters on Kirwan Day, to push for the Kirwan Commission education funding legislation.(Amy Davis)

Is Maryland the best place to live, work and start a business? Maybe not.

I am a New York transplant who came to Maryland 15 years ago to attend graduate school and then law school. In turn, I funneled hundreds of thousands of federal student loan dollars into local educational institutions and invested in Baltimore when I purchased my first home in Hampden in 2008. In 2016, I opened my law practice in the city in hopes of making a good living and providing needed legal services to Marylanders. In my spare time, I do a lot of pro bono and advocacy work focused on issues that benefit Maryland consumers. I love running a small business so much that I teach law students how to open and run their own small and independent law firms.

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But now the livelihood of my business is threatened by a proposal by state elected officials to tax professional services, including law firms like mine. That is a really bad idea for both business owners and consumers.

The state would be double dipping if legislation to support this idea were to pass because they would tax money that is already taxed.

Small businesses like mine get paid for their work after performing services. Unlike personal injury lawsuits, any money my clients and I make back in these cases is already taxed as income, so this is not a free ride for anyone. It’s like wishing for more wishes — you just can’t do it. This is not unique to my business, as people pay for most services with after-tax income.

Taxing small businesses would mean fewer services could be provided. Under legal ethical rules, I am not allowed to pay taxes for my clients, which means that this cost will be passed on to my clients. And many wouldn’t be able to afford it. My law office assists hundreds of Marylanders each year who are suffering from consumer protection problems. I help people who have been economically harmed: who have been cheated out of a fair automobile purchase, overcharged for a personal loan or had the wrong information placed on their credit reports. Many can’t afford to pay upfront, which is why I earn my fees on the back end.

The proposed tax would allow the state to tap into money that is supposed to be making victims of consumer fraud whole for their losses. This policy will strip money from Marylanders who need it the most, as well as other individuals who need to hire lawyers. Imagine having to bear legal costs for a sad and messy divorce, only to be taxed for attorney’s fees.

Attorneys aren’t the only ones who will have to pass on the tax to their consumers; most small businesses will. Small businesses have tight margins and cannot afford to absorb the cost of new taxes. If a person has to pay more for using a service, they will want to use less of the service. This will hurt small businesses in Maryland and the customers they seek to serve.

Small businesses would also incur higher operating costs. As a two-person shop, I regularly hire accountants and other consultants. I tell my students that good businesses delegate administrative duties to focus on fee-generating work. A professional service tax would hurt any small business’ bottom line by creating higher costs for necessary business services. In short, small businesses would lose on both ends — as service providers and as consumers.

Proposing to tax professional services is a cop-out for other failed policy efforts. I was once a budget analyst for the state government when the law changed to build casinos. This was supposed to be the answer to state funding deficits. Now, those promises have failed. In 2018, in the case Blackstone v. Sharma, the Maryland Court of Appeals overturned a decision that would have resulted in taxing wealthy hedge funds that are foreclosing on Maryland homeowners. Those out-of-state businesses are getting a free ride.

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Finally, the proposed legislation also excludes doctors and business associations from the professional service tax requirement. This is arbitrary and indicates that some Maryland businesses matter more than others. Maryland has been a great state for business opportunity. I am proud to run a female-owned business that provides quality legal services, contributes to my local community and gives back through pro bono work.

Let’s not change that by raising costs for small businesses and consumers.

Kat Hyland (kat@lawhyland.com) is principal of the law firm Hyland Law Firm, LLC.

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