Repeal the 3 Percent Withholding Requirement on Government Payments

In 2005, Congress passed the “Tax Increase Prevention and Reconciliation Act,” legislation which imposes burdensome new requirements on government vendors and agencies.

Section 511 of this bill created a sweeping requirement mandating federal, state and local government agencies withhold 3 percent of all payments for goods and services, starting in 2011.

Intended to increase tax compliance by government contractors, this unprecedented withholding requirement will instead, dramatically increase administrative costs and information reporting for vendors and their agency customers.

The provision hurts honest tax-paying businesses by forcing companies to provide the government with an interest-free loan.

This legislation also adversely impacts a company’s cash flow. Prime contractors may be forced to pass a disproportionate amount of withholding payments on to subcontractors and smaller businesses.

Government agencies may be forced to pay more for security solutions as a result of this requirement. Also, state and local governments will be forced to alter their accounting systems and bear some responsibility for federal tax enforcement.

Rep. Wally Herger (R-CA) said, “Unlike income tax withholding, under which a cut of each paycheck is taken out based on the previous year’s tax liability, the 3% withholding for contractors is based on gross revenues. This could lead to over-withholding on taxes, which would adversely impede cash flows for businesses, many of which operate on tight margins already.”

As a member of the Government Withholding Relief Coalition, The Security Industry Association (SIA) is actively working to build support for legislation to repeal the 3 percent withholding requirement.

The Coalition worked closely with Reps. Kendrick Meek (D-FL) and Wally Herger (R-CA) and supports their legislation, H.R. 1023, the “Tax Withholding Relief Act,” to repeal the 3 percent withholding requirement.

During the 110th Congress, the Meek-Herger legislation was supported by 260 members of the House of Representatives. Similar legislation (S.777) was introduced in the Senate.  

For More Information, contact
Don Erickson
SIA’s Director of Government Relations
703-647-8484 or derickson@siaonline.org