SAN ANTONIO — State and local governments dodged a bullet again on the 3% withholding requirement when earlier this month the Internal Revenue Service postponed its start date until 2013.
Now, members of the Government Finance Officers Association and other state and local groups are pushing Congress to permanently remove the expensive withholding requirement.
The law, signed in 2006 as part of the Tax Increase Prevention and Reconciliation Act, requires governments that have $100 million or more a year in contracts to withhold 3% of the payment on any contracts of $10,000 or more. It applies to property payments as well as for services provided by outside vendors.
The withholding requirement has never been implemented. The American Recovery and Reinvestment Act postponed implementation until 2012. Then, the IRS pushed the start date back until Jan. 1, 2013.
The implementation delay, which did not require congressional approval, buys more time for lawmakers to get a permanent repeal attached to tax legislation, according to Cornelia Chebinou, director of the National Association of State Auditors, Comptrollers, and Treasurers. The delay offers state and local governments “more comfort to get something done” by the end of the year, possibly in the tax-extenders legislation, she said.
The law applies to the federal government as well, and could get pricey for federal agencies. The Department of Defense, with massive contracting business, estimated in 2008 that implementation would cost $17 billion over five years.
Linda Cramer, director of finance for Chatham County, Ga., said the withholding requirement will “inflate costs” for state and local governments as contractors pass on the cost of the withholding requirement to governments.
One survey conducted last year before the IRS regulations were released estimated the increase in cost of contracts could jump by hundreds of millions for many states. The Government Withholding Relief Coalition, which includes GFOA and the U.S. Chamber of Commerce, estimated that the law could cost Florida up to $450 million associated with the pass-though increase on contracts.
Implementing the withholding would also add administrative costs associated with software updates, Cramer said.
There is legislation in both the House and Senate that would repeal the withholding requirement for good. The House legislation was introduced in February by Rep. Wally Herger, R-Calif., a member of the Ways and Means Committee.
In March, the withholding relief coalition sent a letter to Senate members advocating for the repeal of the withholding requirement. The letter supported legislation introduced by Sens. Scott Brown, R-Mass., and David Vitter, R-La., that would repeal it.
On Thursday, House Subcommittee on Contracting and Workforce is scheduled to hold a hearing on the issue. State and local groups are drafting a statement in support of a repeal for the committee.
