ABC led the charge on Capitol Hill and within the contractor community to defeat a withholding offset that was to be used to pay for a rural schools initiative, which would have created a new trust fund. This offset would have accelerated the implementation date, to January 1, 2007, of the three percent withholding tax provision included in Section 511 of the Tax Reconciliation Act of 2005 (P.L. 109-222), which mandates that federal, state and local governments withhold 3 percent from payments for goods and services.
ABC worked closely with Congressmen Kenny Hulshof (R-MO) and Lynn Westmoreland (R-GA) and their staffs to get this measure defeated in the early morning hours of December 9, 2006.
Not only is ABC extremely troubled by this ill-conceived tax provision, which advocates of Section 511 argue that withholding payments to contractors is one way of closing the “tax gap” – the difference between what taxpayers should pay and what they actually pay on a timely basis- we were also troubled that there has been virtually no debate on the merits of having the contracting community bear sole responsibility for creating a new trust fund. If Congress feels strongly about creating a new trust fund to fund government programs, then the proper approach would be to fund it through the normal budget process.
Given this latest attempt by Congress to find ways to fund government programs and to close the “tax gap,” it is critical that every ABC member fully understand the impact of the 3 percent withholding tax. While ABC was successful in defeating the acceleration date of this provision, the three percent withholding tax is still scheduled to go into effect in 2011.
A new law requires federal, state, and local governments withhold 3-percent from all payments on goods and services as a guard against possible business tax evasion. The law:
1. Requires withholding of 3% on all government payments for products and services made by the federal, state, and local governments with total expenditures of $100 million or more.
2. Affects payments for goods and services under government contracts as well as payments to any person for a service or product to a government entity (e.g. Medicare, certain grants) 3. Applies to all payments starting in 2011
Withholding applies to the total contract, not to the net revenue generated from a project. For construction contractors, this means the government is withholding funds necessary to complete a project, such as those necessary to pay for subcontractors, material and suppliers.
ABC anticipates the 110th Congress will use this tax provision to fund government programs in the future. ABC will continue to work with the 110th Congress to get this provision repealed. We will be calling on ABC members in the future to help us defeat this tax provision.