MANA ACTION ALERT | URGENT ACTION NEEDED NOW!
Protect Withholding on Independent Contractors
Background
A significant development for reps concerning independent withholding resurfaced last week in the California Legislature.
The California Budget Conference Committee approved a three percent independent contractor withholding provision, similar to a December 2008 proposal. This proposal would drastically affect many reps in California. If approved, the proposal would require your principals even though they are not located in California to withhold three percent of any money you may have earned and remit this amount to the state.
California already has a law that requires businesses that are service recipients (e.g. manufacturers) to report payments made to individual independent contractors – service providers (not corporate service providers). This requirement mirrors Federal law and the requirements for Form 1099.
With the Federal law, there are few questions about the fact the business that receives the service is subject to the law and must issue the Form 1099 to individual independent contractors.
The tricky question about the California law (there are a few other states that have a reporting requirement too) is what businesses (service recipients-the manufacturers) have to withhold taxes from the payments they make to independent contractors in California?
California has a tradition of asserting broad jurisdiction over out of state businesses. Their jurisdictional claims in other matters (e.g. Proposition 65) have not been contested as often as one would think because of practical considerations, so it is not so easy to say whether they really have the jurisdiction they claim.
The definition they use for current reporting requirements imposed on service recipients (e.g. manufacturers) is as follows: “A service-recipient means any individual, person, corporation, association, or partnership, or agent thereof, doing business in this State, deriving trade or business income from sources within this State, or in any manner in the course of trade or business subject to the laws of this State.”
As a practical matter, this proposal makes no sense. What percentage of payments might constitute taxable “profit” varies widely from contract to contract for a rep business. There are hundreds of variables from equipment to transportation costs that can vary dramatically. Other circumstances vary as well, maybe this was a potential customer and your bid to win the business had the thinnest of margins, or perhaps a discount was offered to a long-time loyal customer. To arbitrarily pick a number and say this is what we think you owe as taxes on this book of business, has no basis in business reality.
Action Needed
All California MANA members should write a letter to the Governor with copies to all members of the California Legislature to oppose any independent contractor withholding proposal. Click here for a sample letter to the Governor and click here for the e-mail addresses of the legislators.
The following is the Governor’s contact information:
Governor Arnold Schwarzenegger
State Capitol Building
Sacramento, CA 95814
Phone: 916-445-2841
Fax: 916-558-3160 (new number)
To email the Governor, please visit http://gov.ca.gov/interact
Please copy MANA on any communications you send to the Members of the Legislature.
Thank you.
MANA
16 A Journey, Suite 200
Aliso Viejo, CA 92656
E-mail: MANA@MANAonline.org