OUR THOUGHTS ON:

One Step Closer to Repeal of Three Percent Withholding

Construction

By Matt McKinnon

On November 7, 2011, the Senate voted 94-1 to move to the floor H.R. 674, the bill to repeal the law requiring contractors to pay 3 percent in taxes upfront, upon receipt of payment from federal agencies. Previously, on October 27, the House of Representatives overwhelming passed the bill with a 405-16 favorable vote. President Obama has indicated his support for the bill if it comes to his desk.

History

The 3 percent withholding tax was originally intended as a strategy to close the “tax gap” by reducing tax cheats among government contractors. Enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), the legislation mandated that federal, state, and local governments withhold 3 percent of nearly all of their contract payments, in order to give the government a slice of the taxes owed by contractors up front. The start date of this withholding requirement has been delayed several times since passage, but is scheduled to take effect January 1, 2013.

Consensus

Since passage in 2006, the withholding requirement has met significant resistance. More than 100 associations that represent the contracting community have repeatedly called for the repeal of the provision, citing cash flow harm to businesses.

Construction impact

Opponents of the withholding requirement have speculated that this new burden would likely increase the costs of construction for government projects, since contractors would likely increase the project bid to offset the cost of the withholding. Additionally, contractors have argued that the withholding will reduce their hiring and capital equipment purchasing, as a result of cash flow reductions.

What’s next?

The Senate is expected to begin debating H.R. 674 this week. Fortunately, since the cloture rule of parliamentary procedure has been invoked, the bill cannot be debated for longer than 30 hours. We should be able to have some conclusion on this matter in the very near future.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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