California Dump Truck Owners Association (CDTOA) - California Construction Trucking Association (CCTA)

Blame it on the budget crisis or common sense, Governor Arnold Schwarzenegger has vetoed heavily opposed legislation that would have added to the state’s unemployment numbers and would have severely chilled California’s economic recovery.

The CalChamber along with a large coalition of private, public and non-profit organizations like CDTOA urged the Governor to veto SBX3 17 (Ducheny; D-San Diego), which included a “job killer” proposal that would have imposed two new independent contractor withholding mandates: a 3 percent across-the-board withholding requirement on payments to resident independent contractors and 7 percent for non-residents.

Impedes Economic Recovery

These proposals would have threatened small business survival and imposed a major new cost burden on private, public and non-profit companies and agencies that use independent contractors. With California’s unemployment rate approaching the highest level ever, these proposals ran counter to the state’s need to encourage economic recovery and stimulate job growth.

These measures could have put sole proprietors/small companies out of business. The mandate applied only to payments made to non-corporate individuals and sole proprietorships, California’s smallest businesses. In the current economic downturn, a withholding mandate would have taken resources out of the hands of small business owners and may have put more Californians out of work. In addition, the requirement could have provided an incentive for companies to give business to corporations rather than independent contractors. Clearly, there is a political agenda by most democrats here to make it almost impossible to be a small business and make it in this state.

Government-Mandated Loan

These proposals amounted to a government-mandated loan from California’s smallest businesses that may already be in compliance or have no tax liability. Most of the claimed revenue to be generated from the proposal was accelerated revenue or revenue that will have to be refunded – equivalent to a low-interest loan on the backs of small businesses.

In many cases, money would have been withheld that the state ultimately would have had to refund and could otherwise have been used to keep cash-strapped businesses afloat, many of which are experiencing losses and will not owe taxes.

Creates New Costs

These measures also posed a significant cost burden to the state. A 2005 Franchise Tax Board (FTB) study acknowledged that implementation would be costly and complex. A similar recent proposal (ABX1 12) estimated $10 million implementation cost for Employment Development Department (EDD). For example, last year, the State Controller announced that California’s existing computerized payroll system could not accommodate the Governor’s executive order to reduce the hourly wage of certain state employees, without six months to reconfigure and at a cost of $177 million.

In some cases, the cost of implementation may exceed revenue returns for an individual company. The 2005 Independent Contractor Withholding report by FTB cites a tax compliance rate in the 80th or 90th percentiles for independent contractors (See p. 62 of http://www.ftb.ca.gov/aboutftb/ICW_0105.pdf.)

Thus, for a relatively small percentage of non-compliant taxpayers, the withholding mandate cast a wide, onerous net over tax-compliant companies and agencies, forcing them to pay implementation costs in the thousands to millions of dollars. They would have had to create new manual or computerized payment systems. For many, 1-2 years would have been required to implement, due to the complexity of computer system changes.

Multi-state companies would have had to create systems specific to California, or to modify existing systems that presently serve national or multi-state operations. Companies would have had an ongoing administrative burden of withholding and remitting the withheld amounts.

Penalizes Californians

Both withholding mandates are out of step with federal law and all other states. California would have been the only state with these costly mandates, effectively penalizing job-creating California companies and small businesses for choosing to operate in California.

The measures also shifted tax enforcement function onto the private sector. FTB, unlike business, is specifically designated to collect and enforce taxes. This bill inappropriately shifted onto business what should be FTB’s enforcement burden and responsibility.

The 7 percent non-resident withholding mandate is not federal conformity.  While there is a current 7 percent non-resident withholding mandate at the federal level, it applies only when there is a problem with the independent contractor’s taxpayer identification number. Only Minnesota, Georgia, and Colorado have adopted variations of the federal requirement. Implementation of this far narrower federal withholding mandate at the state level, as proposed by stalled 2008 legislation, AB 1848 (Ma; D-San Francisco), would have been extremely costly and complex. SBX3 17 – which would have applied the 7 percent withholding to all payments to non-resident independent contractors – would have been many times more so.