Groups Ask Congress to Repeal Tax Measure Requiring Govt. to Withhold 3% of Payments

This story appears in the June 6 print edition of Transport Topics.

American Trucking Associations joined more than 30 groups in asking a congressional panel to repeal a tax provision that would require governments to withhold 3% of their contract payments to businesses.

“If [Section] 511 is not repealed, the additional costs resulting from this section will be passed on to the government consumer through higher prices,” ATA said in written testimony May 26 to the House Committee on Small Business’s subcommittee on contracting and workforce.

Section 511 refers to a portion of a tax law passed in 2006. Implementation of the measure has been deferred until 2013.

“There are no winners if the 3% withholding goes into effect,” ATA said.

Mick Mulvaney (R-S.C.), chairman of the subcommittee, said at the hearing the aim of the provision was to close the “tax gap” and “reduce the amount of taxes that were owed by government contractors but went unpaid.”

However, “small businesses today already operate on thin profit margins with little room for any additional withholding,” Mulvaney said.

According to the law, all local, state and federal government agencies would have to give 3% of each contract to the Internal Revenue Service. Contractors would then be credited the money in their tax returns.

ATA disapproved of the law’s requirement that the withholding also apply to fuel surcharges. Given the volatility of fuel prices, it would be difficult for a carrier to operate while receiving fuel surcharge revenue long after the surcharge was calculated based on fuel prices at the time.

About 97% of the for-hire trucking companies in the United States operate 20 or fewer trucks, while 90% of them operate six or fewer, ATA wrote.

Though the May 26 hearing was held by a subcommittee of the Committee on Small Business, the House Ways and Means Committee would have sole jurisdiction over a repeal of the provision, since it is a tax measure, said Jackie Kelly, ATA’s director of legislative affairs.

“When you have a profit margin of between 1% and 3% and you withhold 3%, there’s a lot of operating costs that you no longer have,” Kelly said.

“This 3% withholding would essentially be a loan to the government for the year until our taxes are filed,” Ian Frost, principal of EEE Consulting, Richmond, Va., told the subcommittee in his testimony. Frost represented the American Council of Engineering Companies.

“The withholding could limit our ability to make payroll each month and limit our use of our profits to give bonuses to our employees, expand our business and hire new employees,” he said.

ATA was among 31 organizations to submit written testimony, said Wendy Knox, spokeswoman for the Small Business Committee.

The groups included the U.S. Chamber of Commerce, the National Association of Manufacturers and the Construction Industry Roundtable.

The withholding provision also harms governments, said Bill Wanamaker, director of government traffic and security operations at ATA.

“For every new dollar collected, it’s going to cost many dollars just to administer it,” he said.

The Department of Defense, for example, estimated it would spend $17 billion over five years to administer the withholding, while collecting $6 billion the first year and $200 million per year after that, Mulvaney said.

Representatives from various government agencies, the Associated General Contractors and the Quality Construction Alliance were among the other groups to speak at the hearing.

Meanwhile, Rep. Wally Herger (R-Calif.) and Sen. David Vitter (R-La.) have introduced bills that would repeal the withholding provision.

Wanamaker is optimistic about the bills’ chances of passing.

“The prospects should be ex-tremely high,” he said.

Kelly agrees that the chances are good, though cautions that the repeal could be delayed until at least late this fall.

“It’s essentially repealing tax that has already been written into law,” Kelly said, so its provisions would likely be included in a larger tax measure.

“As of right now, we don’t see any real opposition,” he added.