Opposes Withholding for Independent Contractors

(June 19, 2009) The California Legislature is expected to vote soon on a Democratic-backed budget proposal that includes several billion dollars in new taxes, including targeted tax hikes, a new requirement for business and government to withhold taxes on payments to independent contractors and an Internet tax.

The California Chamber of Commerce is urging members to ask their legislators to say “no” to new taxes on top of the billions of additional dollars employers are already paying due to the budget agreements adopted last year and earlier this year.

The budget conference committee, made up of members from the Senate and Assembly, adopted the tax hikes on a 3-2 party-line vote June 16, with Democrats voting “yes” and the Republicans voting “no.”

On June 17, Governor Arnold Schwarzenegger said he won’t sign a budget that has tax increases in it. “It would be irresponsible after the largest tax increase in California’s history just four months ago to go back to the people and to say we want to increase your taxes, but we want to protect the salaries of state workers,” the Governor said, referring to the conference committee’s refusal to approve a 5 percent salary cut for state employees.

Proposed New Taxes

The package adopted by the conference committee includes the following new revenues:

• A new tax only on oil produced in California, beginning October 1, estimated to raise $830 million in the current fiscal year and $1.1 billion annually in future fiscal years.
• Rolling back the net operating loss (NOL) reforms adopted in the earlier budget agreements to partially conform California to federal law. The ability of businesses and individuals to deduct NOL already has been suspended for two years (an estimated $1.6 billion increase). Rolling back the reforms is estimated to raise $850 million a year by 2014-15.
• A $1.50 per pack increase in the cigarette tax(currently 87 cents per pack) beginning October 1, estimated to raise $1 billion this year and $1.2 billion next year. The revenue from the cigarette tax is estimated to decrease by 3 percent a year in the future.

Independent Contractors

Also adopted was a proposal to impose withholding on payments to independent contractors beginning January 1, 2010. Businesses and government entities would be required to withhold 3 percent of payments to independent contractors for goods and services.

The new requirement is estimated to net more than $1.9 billion for the state initially, increasing to more than $2 billion annually as compliance increases in future years.

Internet Tax

The committee approved extending the sales tax “nexus”—requiring out-of-state sellers that pay commissions to California firms or residents for sales referrals (often through a website link) to collect sales tax on sales to California residents.

A similar CalChamber-opposed proposal failed to move out of an Assembly policy committee earlier this year. The CalChamber pointed out that the proposal harms California online marketplaces, web-service providers, and websites of small businesses and non-profits by changing California’s sales tax law in a way that will encourage out-of-state retailers to instead do business with out-of-state counterparts.

Other Revenues

• Requiring back-up withholding of 7 percent for various non-wage payments;
• Requiring businesses that provide services to register with the state Board of Equalization and file annual use tax returns for purchases on which sales tax was not collected;
• Strengthening the definition of abusive tax shelters to discourage tax avoidance;
• Revoking licenses of occupational and professional licensees who are delinquent in their tax payments.

Action Needed

Contact your legislators and urge them to oppose new taxes. Remind them that California’s long-term fiscal health depends on a recovering economy.

A strong economic recovery will add billions of dollars to the state treasury without increasing taxes, but will occur only if the Governor and Legislature are committed to increasing the state’s competitiveness and ensuring that California is a welcome environment for creating jobs.

Staff Contact: Marc Burgat