Tax law unfairly targets federal contractors

Buylines | Policies, strategies and trends to watch

Steve Charles

The 3 percent contractor
withholding law should be changed.

No one likes to pay taxes, including,
it seems, government contractors.
According to the Government
Accountability Office, some 60,000
contractors owe more than $7 billion
in delinquent taxes. Many of these
same business owners have accumulated
significant personal assets, such
as multimillion-dollar houses, luxury
vehicles and jewelry, GAO said.

During the past three years, GAO
delivered reports and testimony
detailing many instances when government
contractors failed to pay
income and payroll taxes. Congress
responded by passing Section 511 of
the Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA).
The law amended IRS code Section
3402 to require federal and state governments
and "every political subdivision
thereof " to deduct and withhold
3 percent of payments made to contractors
and vendors after Dec. 31,
2010.

Have you thought about how to
manage your cash flow if 3 percent of
everything you invoice the government
is automatically deducted before payment?
Suppose you are a supplier
delivering products at 10 percent more
than the cost of goods sold. The government
will be basically withholding
one-third of your taxable revenue.
How long will it take to get this money
back and put it to work? What is the
business cost of having that money
tied up? How long will it be tied up?
What is the cost to the economy?

If the government is preventing
money from being spent and respent
10 to 20 times during a 15- to-20-
month reconciliation process, isn't it
possible that the cost to the economy
will outweigh the tax collection
benefit? And who is going to pay
the administrative costs that will be
incurred by all parties, including
the Internal Revenue Service, under
this new process?

The good news is that there are
several proposals under way that
should give Congress the assurance
it needs to strike down the 3 percent
withholding law before 2011.

First, proposed Federal
Acquisition Regulation Case 2006-
011 requires offerors to certify
whether they have or have not, within
a three-year period preceding the
offer, been convicted of or had a civil
judgment rendered against them for
violating any tax law or failing to pay
any tax or have been notified of any
delinquent taxes for which the liability
remains unsatisfied.

In addition, offerors will be
required to certify whether or not they
have received a notice of a tax lien
filed against them for which the liability
remains unsatisfied or the lien has
not been released. Comments to this
rule are due May 29.

Second, proposed legislation, the
Contractor Tax Enforcement Act, is
designed to prohibit companies that
owe federal taxes from winning federal
contracts. This bill was amended in
committee May 9 to clarify how the
ban on tax delinquent contractors
would work in the context of the suspension
and debarment process.

Third, two bills propose to strike
down the 3 percent withholding law.
Sen. Larry Craig (R-Idaho) introduced
the Witholding Tax Relief Act
a year ago, and H.R. 1023, sponsored
by Kendrick Meek (D-Fla.), was
referred to the House Ways and
Means Committee Feb. 13.

Let's hope that Congress can see
its way clear to repealing the TIPRA
3 percent withhold. Government contractors
represent only 10 percent of
the overall delinquency burden, leaving
90 percent of the problem
unsolved. Why not improve tax
enforcement practices across the
entire economy to improve the odds
of collecting the roughly $345 billion
that slips through the IRS process
rather than creating yet another
unique process for government contractors
that at most could only net
$33 billion?

Steve Charles is the co-founder of
immixGroup Inc., a government business consulting
firm in McLean, Va. E-mail him at
steve_charles@immixgroup.com.

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