3% Withholding Tax Could Be 100% Dead Soon

There’s potentially good news on the horizon for the contracting community. The 3% withholding tax passed by Congress as part of the Tax Prevention Reconciliation Act of 2005 and scheduled to be fully implemented by January 1, 2013 has been repealed by the U.S. House of Representatives in a bipartisan 405-16 vote; the N&O’s coverage can be found here. The White House has indicated its intention to sign the bill into law if the Senate follows the House’s lead and votes for repeal.

By way of background, the 3% withholding was intended to ensure tax compliance by contractors performing work on government projects. The 2005 legislation required 3% withholding on payments for goods and services to contractors made by all branches of the federal government and its agencies and all units of state and local governments, including counties and parishes, with annual expenditures of $100 million or more.

The Associated General Contractors of America (“AGC”) has been fighting the 3% withholding with gusto, arguing primarily that it would put a squeeze on a contractor’s project cash flow, in turn raising payment bond surety risk that would lead to increased bonding costs. You can read the September 12, 2011 testimony of AGC CEO Stephen E. Sandherr to the IRS opposing implementation of the 3% withholding tax here.