ABC March 5 filed comments with the U.S. Department of Treasury and the Internal Revenue Service (IRS) giving further recommendations on how section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 should be implemented. Section 511 requires that 3 percent be withheld from government contractors on all payments for goods and services made by federal, state and local governments and their agencies to the contractors.
ABC has been fighting for the repeal of the 3 percent withholding tax since the bill was passed in 2006. These efforts have resulted in a one-year delay of the law, which will apply to payments made after Dec. 31, 2011. In its comments, ABC reiterated several points made previously and expressed dismay that those suggestions were not considered in the proposed rule.
“The economy’s current conditions impose a heightened responsibility on IRS and Treasury to seek implementation of the directed 3 percent withholding in a manner that will minimize the financial and other adverse impacts that section 3402(t) could have on government contractors, especially small business contractors.”
One of the issues ABC noted was the negative impact the withholding would have on the cash flow of small businesses. ABC pointed out that since the withholding applies to the contractor’s gross payments, not the net, the 3 percent, plus the typical 10 percent retainage that contractors are also subject to, results in a 30 percent net reduction in the contractor’s cash flow. ABC previously supplied analysis demonstrating how the rule would impact cash flow for contractors.
“One obvious outcome of this rulemaking will be to create a strong disincentive for companies to want to do work for the government,” ABC stated. “At a time when the President and Congress are looking to increase the number of government contractors in order to stimulate the economy, this consequence could be disastrous.”
ABC also noted that the proposed exemption for prime contractor payments to subcontractors compounds the problem for prime contractors because they may not legally be able to subtract the amount of the withholding from payments made to subcontractors. In addition, ABC pointed out taxpayers will be the ones paying for the expensive over-regulation that will come with the implementation of this tax and noted there are more favorable alternatives that can be implemented in place of the 3 percent withholding requirements.
Along with ABC, several governments and governmental agencies from across the country submitted comments expressing concerns about the proposed rule.
“The comments were uniformly opposed to the law and the administrative responsibility being thrust upon their respective agencies,” said Rich Shavell, CPA and immediate past chair of ABC’s National Tax Advisory Group. “Standing out is that the chief financial officer of the IRS also submitted comments suggesting exemptions similar to what ABC has recommended. It is always good to know that at least one segment of the IRS is on the same side as ABC.”
In previous comments, ABC warned that the 3 percent withholding required by the law amounts to a “taking of property” for which the Fifth Amendment of the Constitution requires the government to pay “just compensation.”
ABC’s recommendations also included: the need for the government to correlate amounts withheld with individual contractor’s liability on a quarterly basis in order to reduce the amount and length of time of excess withholdings; providing an exemption for contractors who can show that they will have little or no tax liability for the year in which the withholding will take place; and establishing an exemption process for contractors who can show that the withholding would put a hardship on their business; and excluding S corporations, limited liability corporations (LLC) and other pass-through entities from the requirements.
ABC continues to work with the House and Senate toward full repeal of the 3 percent withholding tax.
To view ABC’s comments and the full text of the rule, click
here.
For more information contact Bob Hirsch at ABC,
hirsch@abc.org.