Tax law unfairly targets federal contractors

The 3 percent contractorwithholding law should be changed.No one likes to pay taxes, including,it seems, government contractors.According to the GovernmentAccountability Office, some 60,000contractors owe more than $7 billionin delinquent taxes. Many of thesesame business owners have accumulatedsignificant personal assets, suchas multimillion-dollar houses, luxuryvehicles and jewelry, GAO said.During the past three years, GAOdelivered reports and testimonydetailing many instances when governmentcontractors failed to payincome and payroll taxes. Congressresponded by passing Section 511 ofthe Tax Increase Prevention andReconciliation Act of 2005 (TIPRA).The law amended IRS code Section3402 to require federal and state governmentsand "every political subdivisionthereof " to deduct and withhold3 percent of payments made to contractorsand vendors after Dec. 31,2010.Have you thought about how tomanage your cash flow if 3 percent ofeverything you invoice the governmentis automatically deducted before payment?Suppose you are a supplierdelivering products at 10 percent morethan the cost of goods sold. The governmentwill be basically withholdingone-third of your taxable revenue.How long will it take to get this moneyback and put it to work? What is thebusiness cost of having that moneytied up? How long will it be tied up?What is the cost to the economy?If the government is preventingmoney from being spent and respent10 to 20 times during a 15- to-20-month reconciliation process, isn't itpossible that the cost to the economywill outweigh the tax collectionbenefit? And who is going to paythe administrative costs that will beincurred by all parties, includingthe Internal Revenue Service, underthis new process?The good news is that there areseveral proposals under way thatshould give Congress the assuranceit needs to strike down the 3 percentwithholding law before 2011.First, proposed FederalAcquisition Regulation Case 2006-011 requires offerors to certifywhether they have or have not, withina three-year period preceding theoffer, been convicted of or had a civiljudgment rendered against them forviolating any tax law or failing to payany tax or have been notified of anydelinquent taxes for which the liabilityremains unsatisfied.In addition, offerors will berequired to certify whether or not theyhave received a notice of a tax lienfiled against them for which the liabilityremains unsatisfied or the lien hasnot been released. Comments to thisrule are due May 29.Second, proposed legislation, theContractor Tax Enforcement Act, isdesigned to prohibit companies thatowe federal taxes from winning federalcontracts. This bill was amended incommittee May 9 to clarify how theban on tax delinquent contractorswould work in the context of the suspensionand debarment process.Third, two bills propose to strikedown the 3 percent withholding law.Sen. Larry Craig (R-Idaho) introducedthe Witholding Tax Relief Acta year ago, and H.R. 1023, sponsoredby Kendrick Meek (D-Fla.), wasreferred to the House Ways andMeans Committee Feb. 13.Let's hope that Congress can seeits way clear to repealing the TIPRA3 percent withhold. Government contractorsrepresent only 10 percent ofthe overall delinquency burden, leaving90 percent of the problemunsolved. Why not improve taxenforcement practices across theentire economy to improve the oddsof collecting the roughly $345 billionthat slips through the IRS processrather than creating yet anotherunique process for government contractorsthat at most could only net$33 billion?