At first glance, a state legislator’s plan to extend California’s sales tax to most services looks simple – if a bit painful: Every time you consult with your lawyer or meet your personal trainer, tack a new 6.5 percent tax on the bill.

But in the world of real estate, professionals say things could get much more complicated. When a typical home changes hands, there are at least 10 separate services, each of which would have to be taxed under the recent proposal from state Sen. Robert Hertzberg, D-Van Nuys. The agent, the title insurance company, the escrow company, the mortgage loan broker, the pest inspector – each would have to pay their sales tax to the state and add that charge and associated costs to the transaction.

What’s more, since the fees for several of these services are split between the buyer and the seller, who ultimately pays for these taxes is bound to become a tug of war in sale negotiations. And whoever pays, it won’t be cheap: On the sale of a $500,000 home, the sales tax could exceed $2,500, big money to a first-time homebuyer.

In short, real estate professionals say extending the sales tax to services for property deals is likely to prove a traumatic experience, both for its complexity and determining who pays. It could even dissuade some people from buying a home.

“This would be a complete nightmare on several levels,” said Nancy Glass, owner of Cardinal Pacific Escrow in Long Beach.

Tax tradeoff

That’s certainly not what Hertzberg envisioned when he introduced Senate Bill 8, which he calls the Upward Mobility Act, in December. The idea to extend the state portion of the sales tax – now 6.5 percent – to services is intended to both expand and stabilize the tax base.

The sales tax dates back to the 1930s, when the state’s economy was mostly farming and manufacturing. Today, services remain exempt from sales tax, even though they account for nearly 80 percent of California’s gross domestic product.

Meanwhile, state coffers have become increasingly reliant on the personal income tax, especially from high-income residents whose earnings are largely tied to the investment markets. So during bull markets, state revenues surge; when the markets tank, the state runs multibillion-dollar deficits.

Hertzberg’s plan to make the state less dependent on income taxes calls for raising up to $10 billion in new revenue by extending the sales tax to most services, excluding health care, education and services from businesses with less than $100,000 in gross receipts.

Only the base sales tax rate of 6.25 percent would be passed on, not the additional sales tax increments that go to local governments.

In exchange, Hertzberg’s plan would seek review of two other taxes – corporate income taxes and the personal income tax – with an eye toward lowering them.

As chair of the Senate committee on government and finance, he plans to hold hearings around the state on his tax plan starting this month. He declined to discuss further details of his plan before those hearings.

“Sen. Hertzberg fully expects to address, during reviews and public hearings statewide, the issue of how any tax on services applies to transactions that involve multiple services,” spokesman Ray Sotero said last week.

Service fees

Already, though, real estate opposition to Hertzberg’s plan is building, chiefly from the politically potent California Association of Realtors, which has opposed previous plans to extend the sales tax to services. Just three years ago, the Think Long Committee for California, of which Hertzberg was a member, proposed extending a 5 percent sales tax to services.

“We opposed the Think Long Committee proposal and are very much opposed to this plan,” said Alex Creel, chief lobbyist for the Realtors association. “Real estate is one of the most service-intensive transactions. There are more services associated with a real estate deal than almost anything else.”

Creel estimates that the 10 services typically involved in a residential real estate transaction each charge fees that cumulatively add up to about 8 percent or 9 percent of a home’s sale price. The biggest components: broker commissions, which typically run about 5 percent of the sale price, followed by title insurance, mortgage loan services and escrow fees. So, on a home that sells for $500,000, all those services add up to roughly $40,000. Add a 6.25 percent tax, and the bill goes up an additional $2,500.

Yet Creel and a couple of local real estate agents said it’s not that simple. The reason: These fees are often split between buyer and seller. The buyer often picks up the appraisal, multiple inspections and mortgage loan fees, while the seller typically takes on the broker fees, most of the title insurance costs and a host of other third-party reports and documentation.

But who pays for what is part of the sales negotiation and can depend on the overall market conditions. When a house has been sitting on the market for months with few offers, the seller might absorb most of those fees or lower the price if the buyer has to take on the fees. In a sellers’ market, buyers are more likely to get stuck with those fees – and the tax bill – or will have to pay more to account for the taxes.

“The reality is it’s the buyer who is bringing the money to the transaction, so the buyer is the one who will pay most of the fees and now, with this proposal, the taxes,” said Geoff McIntosh, a partner in Long Beach realty firm Main Street Partners and treasurer for the Realtors association.

His bigger concern, one shared by other real estate professionals, is what the proposed taxes will do to housing affordability. He noted that many first-time buyers often scramble to assemble the money necessary for the minimum 3.5 percent down payment required by the Federal Housing Administration. Since these service sales taxes cannot be folded into a home loan, they must be added on to the down payment amount.

“If one is buying a house with 3.5 percent down, they typically won’t have an extra $2,000 or $3,000 lying around,” McIntosh said.

Eric Sussman, senior lecturer at UCLA’s Ziman Center for Real Estate and a real estate investor, agreed that housing affordability could suffer.

“There will be some deals that won’t be consummated because of these taxes, especially in marginal cases where potential buyers are trying to cobble together the funds for that down payment,” Sussman said.

McIntosh said the proposed extension of sales taxes to services could even ignite a vicious circle, especially at the beginning. Service providers will have to track new tax obligations, and might raise their own fees to cover the additional cost. That, in turn, will mean higher costs and yet higher taxes.

Escrow company owner Glass, for instance, said she would likely have to hire another worker to track fees and taxes through each deal – not just for her own company, but for the other service providers involved in a deal. Those extra costs will hurt her business or hurt homebuyers.

“If they write the bill so that we cannot pass on those costs to the consumer, then it will hurt my bottom line,” she said. “But they do allow us to pass on the costs, then housing will be that much less affordable for the consumer.”