Three Percent Withholding Repeal and Job Creation Act Signed into Law

President Barack Obama has signed into law the Three Percent Withholding Repeal and Job Creation Act of 2011.

The new statute permanently repeals the requirement that federal, state, and large local governments should start withholding 3 percent of each payment of $10,000 or more to a contractor after January 1, 2013. This amount is held as a down payment of the contractor’s federal income tax liability.

Three percent withholding was passed into law in 2005 and requires that federal, state and local governments withhold 3 percent of contract payments for good and services. Its purpose was to raise revenue by closing the tax gap and preventing a few bad actor contractors from being able to avoid paying taxes on their contracts.

“But three percent withholding would have created significant red tape and compliance costs for contractors and the government agencies that would have to comply with the requirements. Three percent withholding has been delayed twice and would not have gone into effect until 2013,” explained U.S. Senator Barbara A. Mikulski (D-Md.).

The tax withholding measure was crafted in response to a GAO (Government Accountability Office) report that identified rampant tax avoidance by defense contractors. Implementation of the withholding requirement was postponed by the President Obama’s stimulus law in 2009, according to U.S. Senator Toomey (R-Pa.).

It requires government agencies with annual budgets of $100 million or more to withhold 3 percent from the gross contract amount (not net profit) for purchases of products or services. A firm that incurs a tax bill less than the three percent of the contract amount will get a refund at the end of the year.

The House where the bill originated passed the measure on October 27, 2011 by a vote of 405-16.  By voice vote of 95-0, the Senate passed the bill with amendment on November 10, 2011.  On November 16, 2011, on motion that the House suspend the rules and agree to the Senate amendment, the House approved by 422-0 voice vote the amended bill on November 16, 2011. The engrossed bill went to the President’s desk on November 19, 2011.  The President signed it into law on November 21, 2011.

According to the White House, the “bill signing is the culmination of a five-year effort by AGC (Associated General Contractors of America), chapters, members, and industry stakeholders to repeal the 2006 provision.”

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