WASHINGTON – As the California legislature desperately searches for a solution to the state’s budget crisis, at least one proposal has resorted to accounting gimmicks that only appear on paper to raise more revenue. The reality is the additional “revenue” will be gained by stripping it away from honest, hard-working Californians in support of a scheme government authorities say will be a money loser within three years.

The budget proposal passed June 16 by the conference committee imposes a 3 percent withholding on all independent contractors. This withholding is unfair and unnecessary, particularly for direct sellers who historically have high tax compliance rates, treat their direct selling work as a small business and often find direct selling to be the difference between making ends meet and not being able to pay their bills.

While the California Franchise Tax Board (FTB) projects $1.9 billion in revenue for 2009-10 from this withholding, the reality is this is not new revenue – just a scheme to extract money from taxpayers more quickly in an attempt to provide the illusion of a balanced budget. What they don’t consider is the fact that the administrative costs will be high and spent mostly to return these funds to taxpayers because they were over-withheld.

“It is inconceivable that the California legislature would withhold taxes on citizens when they know they are depriving taxpayers of immediate access to their income and that the state will have to spend additional resources to refund the money at the end of the year,” said Joe Mariano, Executive Vice President of the Direct Selling Association (DSA), a national trade group representing companies that market their products through direct selling.

“This is an elaborate ruse to make the budget situation seem less dire than it is. They are prolonging the crisis by providing false solutions, putting the state in a position to lose money and preventing many Californians from access to money they would otherwise spend to help boost California’s economy,” he added.

There are nearly 1.8 million direct sellers in California. Nearly 90 percent are women working part-time to earn supplemental income that will support their family. The median annual income after expenses for an active direct seller is $1,500. However, the state will withhold taxes on their full compensation, before expenses, which includes funds that direct sellers use to purchase inventory, support their business or compensate those who work for them.

This proposal was included in the budget proposal despite the FTB’s previous assertion that at a “rate of 2 percent, almost 70 percent of independent contractors will be over-withheld and more than 40 percent of amounts will be in excess of tax owed.”

DSA has proposed exempting direct sellers from this onerous and counterproductive measure that will be a lose-lose for California’s citizens and the state itself.

“We understand the budget crisis is very real, but the solution is not to put hard-working citizens in a position where their cash flow is limited by an accounting gimmick and their ability to make ends meet is threatened,” Mariano concluded.