Tax & Accounting Blog

Government Entities: One Step Closer to Repeal of the Law that Requires 3% Withholding on Vendor Payments

1099, Cost-Basis Reporting, Information Reporting for Wealth Management, International Reporting & Compliance, ONESOURCE, Tax Information Reporting, Trust Tax, Withholding Management November 23, 2011

The United States Senate joined the House of Representatives in passing H.R. 674 to repeal the 3% withholding requirement that is currently scheduled to begin in 2013 for vendor payments made by federal, state and local governments and their agencies and instrumentalities.  The Senate action puts us one step closer to repeal of the 3% withholding law – but, still, we’re not there yet, because the Senate version of the bill is different from the version passed by the House. Sometime this week, the House may take up the bill again and we’ll see whether they can adopt the Senate version, achieving final passage of a bill for the President to sign.

The Senate’s amendment includes the Vow to Hire Heroes Act, which would create job training programs and assistance for armed forces veterans and an employer tax credit for hiring unemployed veterans.  The amendment also addresses the problem of federal contractors with delinquent taxes by authorizing 100% of federal government payments to contractors (rather than the currently authorized 15%) to be collected by the IRS under levy due to the contractor’s failure to pay federal tax due. This 100% levy would apply to vendors of property, goods or services sold or leased to the federal government.

The 3% withholding requirement was created when Section 3402(t) was added to the tax code as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). It requires federal, state and local governments, and their agencies and instrumentalities, to withhold on payments for services and property (goods, merchandise, materials, equipment, etc.), and regulations specify that this is to begin in 2013.  There are specific exclusions for various types of payments or payees, a limited exclusion for certain existing contracts, and an exception whereby political subdivisions of a state are not required to withhold from payments if their total annual payments (of the type subject to Section 3402(t) withholding) are less than $100 million.