SIA says tax law could hurt government contractors

Starting in January 2011, all government and government agencies and departments will have to withhold 3 percent of payments made to government contractors and send that money to the Internal Revenue Service (IRS). That requirement is part of complying with section 511 of the Tax Increase Prevention and Reconciliation Act of 2005, and only exempts local governments which have less than $100 million in expenditures. The money withheld goes into the general expenditure, and is available as general funding for government programs.

Before January 2011 rolls around, however, industry groups like the Security Industry Association (SIA) are seeking to see a repeal of that requirement. SIA has joined with the Government Withholding Relief Coalition, a coalition of more than 80 business associations which are fighting what they call an "onerous law."

The problem is, says SIA's public relations director Peggy O'Connor, is that the requirement would not only "increase administrative and compliance costs," but she also said, "There's a chance that the cost could get passed on, and there's a chance that it could reduce the number of our members who could get into the government market in the first place."

The cost of compliance is not lost on the Department of Defense, which recently issued a report indicating that the department would likely spent more than $17 billion in the first five years of this legislation on compliance and changing of accounting procedures to meet the letter of the law.

What the Department of Defense is seeing is not unique, says Don Erickson, SIA's director of government relations. Erickson says accounting problems will be one of the difficulties with this part of the tax law.

"Section 511 creates accounting problems and complications in terms of how to collect the money and build it into their accounting systems for these governments," said Erickson. "For the contractors, it creates uncertainty in terms of future cash flow. For long-term contracts, like GSA contracts that might go on for 5 years, they'll have to factor that in when negotiating the contracts."

Erickson points out that the 3 percent withholding requirement was added without scrutiny by a Senate staffer in order to pay for a budget bill. The requirement has since received ire from across a number of industries. In fact, the member list of the Government Withholding Relief Coalition ranges from a concrete industry association, to printing press operators, utility contractors, landscapers, and others. The organization were brought together primarily by the U.S. Chamber of Commerce, says Erickson, who notes that security contractors and product providers are only one small subset of those industries being affected by the tax provision.

Since the provision was added and industries have learned about it, Erickson says there has been an alignment between government and government contractors, and when that happens, "sometimes Congress pays attention." According to Erickson, the U.S. House has already gained interest, with a large number of house members supporting repeal or at least review of the withholding provision.

Nonetheless, the members of the Government Withholding relief collation are challenged by the fact this is an election year, a time when many politicians aren't wanting to rock the boat in terms of paying for government programs.

"Strange things happen in election years, so it's hard to say whether there would be a repeal," said Erickson. "Candidly I think it's tough for the repeal to get through this year, especially through the Senate.

But absent permanent repeal, they could require some type of study of this provision by the Treasury Department or the GAO."

Whether or not 2008 is the year that the provision is repealed or studied is to be seen (a similar bill that would have required a study failed to be accepted in 2007). Nonetheless, industry organizations aren't giving in easily to this new tax. The coalition is currently supporting two bills -- H.R. 1023 and S. 777 -- which would repeal this law.

"If this was a provision that was never subject to public scrutiny, then it seems that there needs to be more study of this, especially in light of the Department of Defense report that came out," said Erickson. "Absent permanent repeal, we firmly believe that there should be a study of this provision."

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