House Committee OK’s Repeal of 3% Withholding

October 18, 2011

On Oct. 13, the House Committee on Ways and Means favorably reported by voice vote  H.R. 674, sponsored by Rep. Wally Herger (R-Calif.) and Rep. Earl Blumenauer (D-Ore.), to repeal the three-percent withholding rule on certain payments made to vendors by government entities.

The three-percent withholding requirement was created under H.R. 4297 (the Tax Increase Prevention and Reconciliation Act of 2005), which included this unfair withholding burden on government contractors, with an implementation date of Jan. 1, 2011, as a way to help prevent tax avoidance.

The impetus behind it is that lawmakers believed that they could help close the roughly $300 billion tax gap by reducing the number of opportunities that contractors have to leave income unreported. Its implementation date has been pushed back twice as lawmakers pondered whether it should be enacted or repealed. It was delayed by one year to Jan. 1, 2012 as part of the 2009 stimulus law and then further delayed to Jan. 1, 2013 by the IRS in recognition of the exorbitant expenditures that will be necessary to implement accounting systems and hire new compliance employees. President Barack Obama included a provision in his American Jobs Act of 2011 that would further delay implementation until 2014.

NSBA has been working to repeal this provision as this requirement hurts honest taxpaying businesses while attempting to find tax delinquents by essentially forcing companies to provide the federal government with an interest-free loan. It is based on revenue from government payments with no relationship to a company’s taxable income, and the three-percent withholding significantly affects businesses’ cash flow needed for day-to-day operations.

Following last week’s approval of repealing the three-percent withholding tax in teh Ways and Means Committee, the bill now awaits House action which is likely to occur the week of Oct. 24.

NSBA is urging all small businesses to contact their Representatives today and encourage their support of H.R. 674 for full repeal of the three-percent withholding tax.