Thursday, November 18, 2010

113 Industry Associations Urge Congress to Repeal 3% Withholding Requirement

Unless Congress acts soon to repeal 2005 legislation, starting on January 1, 2012, just a little over a year from now, federal, state, and local governments and agencies with annual expenditures in excess of $100 million will be required to withhold 3% of each payment to vendors, contractors, and consultants, and send the money to the federal government for income tax purposes.

Associations Urge Delay or Repeal:  On November 11, 2010, a coalition of 113 industry associations sent a letter to all members of Congress urging them to delay implementation of the 3% withholding tax for two years, if full repeal is not possible during the lame duck session this year.  Click here to read the five page letter and documentation.  The Government Withholding Relief Coalition also asked Congress to conduct an independent study of the real cost of implementing the 3% withholding tax.  

Cost Concerns Raised:  Significant concerns have been raised by both businesses and government agencies on the cost of implementing this new tax.  The Coalition has argued that since the legislation was passed in 2005, there have been a number of reforms approved that mitigate against the need for the tax.  Government agencies and businesses are beginning to incur costs now as they gear up to implement the legislation on January 1, 2012.

Read the Legislation: Click here to read the actual 3% withholding tax legislation (one page).  You will note at the end of the legislation it states it is effective for payments made after December 31, 2010.  That was subsequently amended by ARRA (American Recovery and Reinvestment Act) on February 17, 2009 to delay implementation until January 1, 2012.

Federal Policy Collision:  Interestingly, at the same time the 3% withholding tax is moving forward, the U.S. Department of Transportation has adopted regulations (49 CFR 26.29) that restrict withholding of retainage on federally funded projects due to the negative impact it has on small and disadvantaged businesses.  This represents a public policy is a collision at the federal level:  the 3% withholding tax is detrimental to small businesses, while USDOT's regulations are designed to protect small businesses.

Retainage Regulations:  USDOT's retainage regulations are problematic for some states, such as Washington, that requires withholding of retainage to protect the claims of subcontractors, suppliers, and workers (RCW 60.28.011).  More on this in an upcoming blog.

Mike Purdy's Public Contracting Blog (© 2010 by Michael E. Purdy Associates)

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