Ways and Means Committee Approves 3% Withholding Repeal by Voice Vote

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The House Ways and Means Committee approved a bill yesterday, H.R. 674, that would repeal the 3% withholding tax. The legislation is expected to reach the House floor for a full vote before the end of the month.

Should the bill be signed into law, it would eliminate a provision that requires all local, state and federal entities to withhold 3% from their payments to contractors starting in 2013. H.R. 674 was approved by voice vote, a procedure typically used for measures that are non-controversial and enjoy widespread bipartisan support.

“Today we have taken an important step in doing what Americans have called upon Congress to do: work together in a bipartisan way to encourage job creation,” said Rep. Wally Herger (R-CA), the bill’s original sponsor. “The 3% withholding tax stands in the way of jobs because it threatens to constrict the cash flow of thousands of small businesses that provide goods and services to federal, state and local government agencies. Permanently repealing this tax is an important step toward giving these businesses the assurance that it’s safe to invest, grow, and hire more workers.”

“We’re looking for actions Congress can take to create jobs right now. This is a win-win. I urge all members to support this legislation,” he added.

As reported in yesterday’s edition of NACM’s eNews, the 3% withholding tax was originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. While its goal was to address the nation’s tax gap, representing the annual $345 billion in taxes legally owed but left uncollected, the provision would ultimately do more harm than good, wreaking havoc on the cash flow of companies that do business with government entities.

Prior to the markup, NACM sent a letter in support of H.R. 674 to Ways and Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI). NACM has opposed the 3% withholding requirements since its enactment and welcomes the repeal bill’s progress.

For more information on NACM’s fight to repeal the 3% withholding tax, click here.

Jacob Barron, CICP, NACM staff writer

Pressure Builds for 3% Withholding Repeal

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One provision in President Barack Obama’s recently released American Jobs Act would further delay the 3% withholding tax on government contracts by another year. GOP lawmakers, and a coalition of business advocates, are pushing him to go a step further, to a full repeal.

The 3% withholding tax is currently set to go into effect on all government contracts worth more than $10,000 in 2013, after a series of delays since its enactment in 2006. A full repeal has remained elusive however, as eliminating the withholding requirement from the books would keep an estimated $11 billion from the nation’s ailing Treasury. Nonetheless, Republican officials are using the newly proposed delay to mount a new push for a full repeal.

"The President must know how damaging the 3% withholding rules are, as his Jobs Act calls for an additional year delay in its implementation. But if it is so harmful to small business—which it is—why not repeal it outright?,” asked Rep. Mick Mulvaney (R-SC), chairman of the House Small Business Committee’s Subcommittee on Contracting and Workforce. “Majority Leader Eric Cantor has signaled that the repeal of this job-crushing withholding requirement will be on the House agenda this fall. I hope that the President & Senate Majority Leader Harry Reid (D-NV) will also support this repeal.”

“The 3% withholding tax would hurt small business cash flow and job growth. Delaying its repeal only continues uncertainty for small business contractors. Permanent repeal will provide more certainty and help create jobs now,” he added.

Joining Mulvaney at a press conference this week was Rep. Wally Herger (R-CA), sponsor of H.R. 674, a bipartisan bill that would repeal the 3% withholding tax and has garnered 241 cosponsors. “The 3% withholding tax will harm small businesses as well as state and local governments. We need to get it off the books once and for all to avoid placing small businesses, jobs across America and our economic recovery efforts at greater risk,” said Herger. “I look forward to working with House Leadership to ensure that we get this bill passed to help our economy.”

NACM has supported a full repeal of the 3% withholding tax since its enactment, and is a proud member of the Government Withholding Relief Coalition (GWRC), which continues to lobby for relief from this burdensome tax. Stay tuned to NACM’s blog and NACM’s eNews for further updates on the repeal effort.

Jacob Barron, CICP, NACM staff writer

IRS Delays 3% Withholding Requirement to 2013

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Hearing Scheduled in House Small Business Committee
The Internal Revenue Service (IRS) issued final rules last week that delay the 3% withholding requirement on government contracts until 2013. Under this arrangement, the withholding and reporting requirements will apply to payments made after December 31, 2012.

Additionally, the House Small Business Committee will hold a hearing on May 26 in order to more thoroughly address the 3% requirement. A repeal bill in the House, H.R. 674, originally introduced by Rep. Wally Herger (R-CA), has also garnered more than 100 cosponsors.

The delay drew cheers from prominent lawmakers, who were encouraged by the IRS' decision, but are still hopeful for a full repeal. "This decision couldn't come at a better time. Small businesses are pinching pennies and cannot afford to receive reduced payments for government contracts," said Sen. Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship. "Many small businesses are already suffering, trying to make payroll and expand their businesses, and this rule would close the book on too many small businesses. While the delay is a move in the right direction, I am also committed to working with the Finance Committee to repeal this requirement that harms small businesses."

Gearing Up for the 3% Withholding Tax

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As the clock continues to tick toward 2012, many credit professionals have been asking about the 3% withholding tax, which is still set to go into effect at the end of the year on most government contracts.

The provision was tucked into the Tax Increase Prevention and Reconciliation Act (TIPRA), enacted in 2006, originally included as a means to reduce the nation’s tax gap, which is the annual difference between taxes legally owed and taxes collected, totaling about $345 billion. Essentially, the idea was that since a number of contractors that did business with the government didn’t accurately pay their tax bills, a withholding requirement would offset the revenue lost from these contractors’ non-compliance. Observers quickly noted that merchants selling to the government that were forced to comply with this new requirement would simply raise their prices, meaning the whole provision would provide zero sum gain.

The provision was originally set to go into effect on all contracts dated after December 31, 2010, but that deadline was delayed to contracts dated after December 31, 2011 by a provision in the American Recovery and Reinvestment Act of 2009, popularly known as the stimulus bill.

The details of the provision are many, and more than a little beguiling.

According to the text, the withholding requirement would apply to government entities, including states, municipalities or any instrumentality thereof, with annual procurement budgets in excess of $100 million, which would exclude a lot of local agencies in many smaller towns. It would also only apply to purchases worth more than $10,000, and according to the Internal Revenue Service (IRS), entities and businesses would not be allowed to divide payments up into two or more in order to make them exempt under the $10,000 threshold. Certain payments would be excluded, like payments of interest, for real property, to tax-exempt entities and to foreign governments, although it should be noted that “real property” does not include payments for the construction of buildings or public works. This is a fairly vague definition, so establishing which of these payments would or would not be subject to the withholding requirement could prove challenging.

IRS guidance on the subject notes that the withholding would only apply to payments made by the government entity to the prime contractor, meaning there is no flow down to subcontractors. Payments made under contracts existing prior to the December 31, 2011 effective date will not be subject to withholding.

Advocacy

NACM has opposed the 3% withholding tax since its inception, and continues to hope that lawmakers come to their senses and repeal it.

Several bills and amendments have been proposed over the course of the provision’s life that would remove it from the record, and prevent it from ever damaging the cash flow of companies that do business with local, state and federal entities. The most recent of these is an amendment, still pending at the time of this writing, to S. 493, the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) Reauthorization Act, introduced by Senators David Vitter (R-LA) and Scott Brown (R-MA). Vitter and Brown have previously introduced their own standalone repeal bills before combining them into this amendment, which would likewise eliminate the 3% withholding requirement and tell agencies and companies to act as though it were never enacted.

The issue with previous repeal efforts was that they weren’t attached to measures that would offset the revenue loss of repealing the 3% withholding; as expensive as it would be in the long run, the 3% tax would generate revenue for the government, and any repeal effort will have to include some commensurate form of spending cuts or revenue generators. Amendment 212 gets around this by rescinding $39 billion in funds appropriated but unspent by government agencies, excluding the Departments of Defense and Veterans Affairs.

“The withholding is a flat percentage of revenues from government payments, bears no relationship to companies’ taxable incomes and will restrict cash flow needed for day-to-day operations and investments,” said the Government Withholding Relief Coalition (GWRC) in a recent letter to lawmakers in support of Amendment 212. NACM is counted among the dozens of members of the Coalition, which was formed to repeal the requirement shortly after its enactment and the NACM Government Business Group (GBG) has been active in keeping its members informed of the implications and encouraging contact with respective representatives.

The letter continued, pointing out that governments and governmental entities themselves will scarcely have the resources to handle the implementation of the new requirement. “In addition, the administrative and capital investment costs that compliance with 3% withholding will impose on businesses and governments will be substantial, and the mandate will be exceedingly complicated to implement. Three percent withholding will be especially burdensome for small firms. With the withholding mandate scheduled to take effect on January 1, 2012, businesses and governments are expending limited resources now in order to make the major system and process changes needed to implement this provision. This is a particular challenge for cash-strapped state and local governments.”

For more information on the 3% withholding tax, stay tuned to NACM's Credit Real-Time blog, NACM's eNews, and Business Credit magazine.
 
Jacob Barron, NACM staff writer

Amendment to Small Business Bill Would Repeal 3% Withholding Requirement

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Two 3% withholding relief bills have been combined into one amendment to a small business bill currently being debated in the Senate.

Sens. David Vitter (R-LA) and Scott Brown (R-MA) combined their dueling repeals of the 3% withholding tax, set to go into effect on most government contracts in 2012, to create Amendment 212 to S. 493, the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) Reauthorization Act. The amendment would use Brown's template for funding the 3% repeal by rescinding $39 billion in funds appropriated but unspent by government agencies excluding the Departments of Defense and Veterans Affairs.

The 3% withholding requirement was originally enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in 2006. It was originally scheduled to go into effect on Jan. 1, 2011, but was delayed to Jan. 1, 2012 in 2009 by the American Recovery and Reinvestment Act (ARRA). Should the requirement go into effect, most transactions for goods and services with a government entity would be subject to a 3% withholding tax, kept by the governmental entity in question.

NACM has fought the enactment of this provision, which will fall disproportionately on smaller businesses, since its introduction. As a member of the Government Withholding Relief Commission (GWRC), NACM has lobbied for a full repeal and hopes Congress acts quickly to remove this unfair and potentially harmful provision from the tax code.

"The withholding is a flat percentage of revenues from government payments, bears no relationship to companies' taxable incomes and will restrict cash flow needed for day-to-day operations and investments," said the GWRC in a recent letter supporting Amendment 212. "In addition, the administrative and capital investment costs that compliance with 3% withholding will impose on businesses and governments will be substantial, and the mandate will be exceedingly complicated to implement."

Stay tuned to NACM's eNews and Credit Real-Time Blog for any further updates.

Jacob Barron, NACM staff writer

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