How is an attorney like a traveling salesman?
By Scott Brandt-Erichsen
A few attorneys around this state may have noticed that economic pressures are causing some local governments to look more closely at whether commercial transactions are escaping sales tax charges.
In Ketchikan, for example, up until about 18 months ago the Ketchikan Gateway Borough did not routinely monitor whether attorneys who only practice in Ketchikan occasionally were current in their sales tax registration and quarterly sales tax filings. That is changing.
Part of the thanks for the additional attention may be attributed to an inquiry by Ketchikan attorney A. Fred Miller. Mr. Miller had a client who did not have services performed in Ketchikan. He inquired as to whether the Borough would have jurisdiction to impose sales taxes on services for the client rendered in another jurisdiction where neither the client nor the services took place in Ketchikan. The only connection with Ketchikan was the fact that Mr. Miller's regular office is located in Ketchikan.
Multi-jurisdictional services offer an opportunity to apply such lofty constitutional principles as due process , the commerce clause and equal protection to such mundane issues as sales tax. It seems that the ability to tax requires both a due process nexus with the activity subject to the tax as well as nondiscrimination against similarly situated service providers. Without getting into a detailed analysis the general rules go something like this: You can't tax somebody if they don't have any connection with the taxing jurisdiction (due process nexus); two different jurisdictions can't tax someone twice for the same thing (due process); and if two similarly situated transactions aren't classified and distinguished then they have to be treated the same (equal protection).
The KGB code provides in part that:
"Retail sale or sale at means any non-exempt sale of services, rental, or tangible personal property made to a buyer who intends to use, consume, or receive the item or services purchases for his own personal use as the ultimate consumer with not intention to sell the item again,...except as provided below or in section 45.20.013 and 45.20.055 of this title, a retail sale or sale at retail is subject to sales tax if the sales occurs within the Borough...(b) the delivery of property or services in the city and/or borough is considered subject to sales tax if the seller maintains any office, distribution or sales house within the city or borough....(d) Where a buyer receives a service within the corporation limits of the City of Ketchikan, and the said service begins and ends therein, or where the buyer receives an entire service therein,...the sale of the item is subject to both the city's and the boroughs' sales taxes."
Looking at legal services, let's say, for example, that attorney X who routinely practices in Ketchikan has a client who lives in Bethel who hires her to appear in court in Bethel for an FED hearing. The attorney travels to Bethel, appears in court in Bethel on the matter, and returns to Ketchikan. The client, a Bethel resident, never sets foot in Ketchikan. The attorney does not bill for any time worked on the case in Ketchikan, and only provides services in Bethel. Under these circumstances the services provided in Bethel would not be taxable by Ketchikan's tax on goods and services. If Bethel imposes a sales tax on legal services, however, the services would be subject to sales tax in Bethel. Both Bethel and Ketchikan couldn't tax for the same services, and as between Bethel and Ketchikan, Bethel would be the jurisdiction entitled to tax that transaction.
In another example, if an attorney represents a client in Craig in a criminal matter, and the arraignment is held telephonically with the client in Craig and the attorney present in the courtroom in Ketchikan, the attorney provides the service within the Borough, and that portion of the service would be subject to sales tax. If, however, when the case goes to trial, the trial takes place in Craig, those services provided outside of the Ketchikan Gateway Borough would not be subject to sales tax.
The riddle in the title asks "How is an Attorney like a traveling salesman?" As a practical matter, when it comes to sales taxes, itinerant attorney services are indistinguishable from sales by a traveling salesman. When in Ketchikan, for example, Nordstrom's makes annual traveling exhibitions for which many locals, my daughters included, are very grateful. Like any good itinerant merchant, Nordstrom's fills out the appropriate tax return and remits KGB sales taxes on their sales. Unfortunately this is not always the case for the traveling attorney who has a trial or deposition in Ketchikan periodically. Under the KGB sales tax code there is no distinction between these two purveyors of goods and services. So how is an attorney like a traveling salesman? Both are subject to the laws of the jurisdictions from which they choose to operate.
If you have read this far you may be thinking: "So what, Anchorage has no sales tax, most attorneys are in Anchorage, WHO Cares!" The " so what" is that the finance department in Ketchikan started looking at the court docket (a secret KGB informant) about 6 months ago and picking out names of attorneys appearing in cases in Ketchikan as a method to identify people who may be providing legal services within the jurisdiction but who have not registered for sales tax services or filed sales tax returns for the Ketchikan Gateway Borough. The obligation to register for sales taxes and file returns applies even if the client is an exempt entity. You may get one of their letters. You may not like it. Some who have received the letters have said so.
Why write about it in the Bar Rag and invite abuse? Frankly I have received a couple inquiring letters already, and determined that it may be easier to explain it "en masse" and take the abuse all at once rather than in dribs and drabs. Also one of the attorneys who was surprised to learn of their sales tax obligations suggested that the Borough do a mailing to each individual attorney in the state. Rather than annoying folks who never practice in Ketchikan, I thought notice through the Bar Rag might be a less objectionable method. If you would like to register, forms are now available on the KGB website: www.borough.ketchikan.ak.us. Go to the finance department page and select KGB forms.