House Passes Repeal of 3% Withholding on Government Contracts

The House of Representatives passed a bill October 27 to repeal a law that beginning in 2013 requires tax withholding of 3% of payments to vendors and contractors providing services to federal, state and local governments and their agencies. The bill, H.R. 674, passed by a vote of 405-16 and now goes to the Senate for consideration.

The bill would remove Sec. 3402(t), which Congress enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222. Sec. 3402(t) requires the withholding from payments by the federal or state governments or their instrumentalities or subdivisions (including multistate agencies) to any person for services or property.

As part of the Government Withholding Relief Coalition, a 100-plus-member coalition of local governments, industrial and professional associations, and interest groups, the AICPA has been among advocates for repeal of the law.

In letters to Congress earlier this year and again this week, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, requested repeal of the withholding provision, calling it an undue burden for both governments and contractors and unnecessary given existing tools that already monitor contractors’ federal tax compliance. Thompson said farmers who receive payments from the U.S. Department of Agriculture and fishermen will be adversely affected, as well as doctors and other medical professionals who accept Medicare payments. Also, even with the extensions of its effective date intended to allow governments to reprogram their payment systems, those governments are still forced to spend limited funds to do so, Thompson wrote.

“Moreover, in the absence of repeal, the withholding law will likely have a pronounced (but negative) impact on government contractors with low profit margins, potentially threatening their operations due to a tightening of cash flow,” she wrote in her October 25, 2011, letter to members of the House of Representatives urging passage of H.R. 674.