NSPE Declares Victory Over Unpopular Withholding Tax


December 2011

NSPE Declares Victory Over Unpopular Withholding Tax


After a five-year battle, NSPE can declare victory over an onerous tax-withholding mandate that would have placed significant financial and administrative burdens on engineering firms that contract with the government. On November 16, the House approved H.R. 674, which would repeal Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (PL 109-222), sending it to the president's desk for signature.

Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (PL 109-222) would require federal, state, and certain local governments to withhold as tax 3% of all payments in excess of $100 million made to government contractors. The withholding rule was intended to prevent government contractors from continuing to receive pay if they were delinquent in their taxes. It was a last-minute addition to the legislation, however, and was never open to congressional or public input. Since TIPRA's passage, NSPE has been working with groups, including the Government Withholding Relief Coalition and the U.S. Chamber of Commerce, to repeal the withholding mandate.

Because the withholding requirement was never open to debate or comment, it was rife with problems. Small businesses—like most engineering firms—would have suffered most because the profit margin on their government contracts is often less than 3%. This means the withholding mandate would have created cash flow problems, costing engineering firms the vital funds they need to conduct day-to-day business (including paying subcontractors), and stymied their ability to create new jobs. Some firms may even have been forced to seek outside financing to complete contracts. Firms would eventually have been able to recoup their expenses, but not until the end of the tax year. Moreover, the withholding rule would have compelled firms to implement complex and costly accounting systems and required reporting every transaction covered by the mandate.

The withholding rule also would have stretched the resources of state and local governments by requiring them to spend their own scarce funds to administer the new program. Further, contracting costs across the board could have risen as procurement became more expensive and firms increased their rates to help close the gap between the withholding requirement and their cash flow.

To add insult to injury, the Joint Committee on Taxation predicted that after the withholding mandate's first year in action, all revenue increases from the requirement would be generated through the interest the government would earn on the withholdings. In plain English: Engineering firms and other government contractors would be providing an interest-free loan to the government, potentially at the expense of their livelihoods.

The withholding requirement was a blunt instrument, punishing many for the transgressions of the few. While the mandate was intended to prevent tax-cheating, the government already requires contractors to certify their compliance with federal tax law. In a letter to House Ways and Means Committee Chairman Dave Camp (R-MI), NSPE President Chris Stone, P.E., F.NSPE, wrote, "While NSPE believes that vendors receiving payments from the government should meet their tax obligations, imposing a burdensome withholding tax on every transaction between government and professional engineers designing America's infrastructure is not the answer."

Luckily, the withholding mandate never took effect. Originally scheduled for implementation on January 1, 2011, the American Recovery and Reinvestment Act of 2009 (PL 111-5) delayed the effective date to December 31, 2011. The IRS then delayed the effective date again to December 31, 2012. Chairman Mick Mulvaney (R-SC) pointed out the reluctance to impose the withholding requirement at a Small Business Contracting and Workforce Subcommittee hearing in May, calling the mandate "such a bad idea that when it was first enacted in 2006, Congress immediately delayed its implementation for five years until 2011."

With the deadline approaching, support for the withholding mandate's repeal built on both sides of the aisle, culminating in overwhelmingly favorable House and Senate votes that enabled H.R. 674 to pass.

NSPE would like to thank the NSPE members who used the NSPE Legislation Action Center to contact their senators regarding the withholding repeal. Combined with NSPE's work, your grassroots efforts helped build a critical mass of opinion that will ensure professional engineers remain in business.