Legislation introduced to repeal 3 percent withholding provision
Bills have been introduced in the U.S. House and Senate to repeal the 3 percent withholding provision. The provision mandates that federal, state, and local governments with expenditures of more than $100 million withhold for tax purposes 3 percent of payments for products and services valued at more than $10,000.
The legislation, H.R.674 in the House and S.89 and S.164 in the Senate, have been referred to their respective committees, the House Committee on Ways and Means and the Senate Committee on Finance.
H.R.674 has 61 co-sponsors while S.89 has 6 co-sponsors and S.164 has 4 co-sponsors. S.89 and S.164 are titled “Withholding Tax Relief Act of 2011,” while H.R.674 is titled “To amend the Internal Revenue Code of 1986 to repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities.” Amendment 212 to S. 493, the “SBIR/STTR Reauthorization Act of 2011,” also would repeal the withholding provision.
The 3 percent withholding provision was incorporated into the 2005 Tax Increase Prevention and Reconciliation Act in an attempt to guarantee that individuals and companies with outstanding tax debts do not receive new federal payments.
“It’s a provision that is equally damaging to both sides of the contractor relationship — both the government buying agency as well as the contractor providing the supplies and services,” said Chris Braddock who is senior director of procurement policy at the Washington-based U.S. Chamber of Commerce. Braddock and the U.S. Chamber support the Government Withholding Relief Coalition, which has 116 trade groups as members. The coalition is working to repeal the withholding provision well before it is to take effect on Jan. 1, 2012.
The withholding provision will require governments to make costly changes to their financial accounting systems to track withheld payments, Braddock told Govpro.com. Governments will have to pay additional staff or allocate current employees’ time to track withheld funds, which could cover thousands or millions of individual payments to government contractors, said Braddock. He noted that the U.S. Department of Defense has estimated that it will spend $17 billion to implement the 3 percent withholding provision if it takes effect.
Braddock urges public sector administrators “to be as aggressive as possible with Congress on demonstrating the problems and the significant costs that the withholding provision will have, and to demonstrate to Congress and its leaders that the provision needs to be repealed early this year.”