California tax plan riles independent contractors

By Danny King

California travel industry members are taking issue with a proposal by state legislators to require employers to withhold state income tax from their payments to independent contractors and remit it directly to the cash-strapped state.

While the state needs the money to offset a looming deficit, the plan has attracted broad opposition from business interests. Opponents in travel say the bill would put an extra strain on an industry that pays much of its wages in the form of contractor commissions.

The Southern California chapter of ASTA has invited 1,300 members to Sacramento next month as part of an effort to lobby against the proposal, which was reintroduced by state Senate Democrats after being vetoed last year by Gov. Arnold Schwarzenegger.

That earlier bill, which proposed that California businesses withhold 3% of payments to in-state independent contractors and 7% to out-of-state contractors, was estimated to give California an immediate windfall of as much as $2 billion if passed.

More than 800 companies and organizations, including the California Coalition of Travel Organizations, last week joined the California Chamber of Commerce in opposing the measure, which has been proposed as a way to chip away at the state’s $20 billion budget deficit by ensuring that the state receives taxes owed by independent contractors.

Travel agents say they would be particularly hard hit because of both the financial and accounting obligations that would be undertaken by an industry in which many professionals work as independent contractors collecting commission-based wages.

"Why would the state think there would be additional income unless it’s not enforcing the law that presently exists?" said Susan Tanzman, vice president of the CCTO and owner of Los Angeles-based Martin’s Travel and Tours, whose agents are all independent contractors. "There’s no reason a small business should start accounting for this kind of stuff."

While the amount of revenue generated by California travel agents isn’t tracked, U.S. offline sources, including traditional travel agents and companies’ central reservation systems, booked about $144 billion in travel reservations last year, according to PhoCusWright, indicating that annual reservations booked by California agencies might be well into the billions of dollars.

Opposing groups have likened the measure to a loan to the state, because companies would have to pay most of the estimated contractor taxes by June. Taxpayers would have to wait until the following April for the state to settle up on any possible overpayment.

Representatives at the office of Senate President pro tem Darrell Steinberg (D-Sacramento) didn’t respond to requests for comment.

At the federal level, payments to independent contractors are generally not subject to withholding, and the practice appears to be rare among the states.

Last year, Minnesota enacted a law requiring construction firms to withhold 2% of wages paid to construction contractors if the work exceeded $600, but that law didn’t extend beyond the building industry.

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