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NRCA issues comments about IRS' 3 percent withholding tax, April 2008

On April 28, NRCA submitted comments to the Internal Revenue Service about how it should implement the 3 percent withholding rule. NRCA's comments follow.

April 28, 2008

(Notice 2008-38)
Internal Revenue Service
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Sent via Electronic Mail

To Whom It May Concern:

On behalf of the National Roofing Contractors Association (NRCA), thank you for the opportunity to provide comments to the Internal Revenue Service (IRS) on how to implement the withholding of 3 percent by federal, state and local governments for all payments for goods and services, as is mandated by the Tax Increase Prevention and Reconciliation Act of 2005. NRCA submits these comments in response to the request for guidance published in Internal Revenue Bulletin dated March 31, 2008.

Established in 1886, NRCA is one of the construction industry's oldest trade associations and the voice of professional roofing contractors worldwide. NRCA is an association of roofing, roof deck, and waterproofing contractors; industry-related associate members, including manufacturers, distributors, architects, consultants, engineers, and city, state, and government agencies; and international members. NRCA has approximately 4,600 members from all 50 states and 54 countries and is affiliated with 105 local, state, regional and international roofing contractor associations.

NRCA denounces in the strongest terms contractors who deliberately attempt to avoid paying their taxes. These bad actors gain an unfair advantage over the vast majority of law-abiding members of our industry and tarnish our collective reputation. However, our industry is deeply concerned about the unintended consequences of this withholding requirement and of the tremendous cost taxpayers will be forced to bear for its implementation. The withholding requirement in question wrongly assumes every contractor seeks to cheat the government and punishes the good with the bad, while achieving a very minimal increase in taxpayer compliance.

NRCA is pleased the IRS has requested guidance on this matter, but we do not believe it is possible to implement this withholding requirement without serious harm and disruption to businesses that provide vital goods and services to all levels of government. In regard to providing suggestions on how to implement this requirement, we can only point out a number of key variables the IRS must take into account if it is to have any chance of successfully developing a solution to this regulatory quagmire.
  1. Prime Contractor and Subcontractor Relationship. NRCA encourages the IRS to clearly state how this withholding requirement will change the business relationship between contractors and subcontractors. Our industry and the entire construction sector have worked to establish standards for the contractual relationships between different entities involved in a construction project. The fruits of these efforts are demonstrated in "consensus" contract documents offered by the American Institute of Architects and The Associated General Contractors of America. The IRS must consider these consensus documents when implementing the withholding regulations, so as not to disrupt the balance of risk and responsibilities between prime contractors and subcontractors.

  2. Timing of Refunds. The three-percent to be withheld is taken from the total payment for a good or service, not profit which determines tax liability. In many cases, the profit margin for a roofing project is less than three-percent, resulting in near certain cash-flow and operating-capital disruption. This burden will be particularly felt by small businesses and cause many of them to avoid government contracts. The IRS must first address this issue by developing protocols for the quick return of withheld amounts and then explore options to mitigate this financial pressure.

  3. Small Disadvantaged Businesses (SDB). Businesses certified as SDB under the Small Business Administration's 8(a) Business Development Program are eligible to compete for contracts set aside for them. Many state and local government entities have similar programs. The IRS must consider how the withholding regulations will impact these programs because a business certified as SDB is least likely to be able to afford the cash-flow problems caused by the withholding requirement. The IRS proposed regulations to implement the withholding could result in a reduction in the number of SDBs competing for government contracts.

  4. Prompt Payment Act (PPA). The PPA requires the federal government to make payment within 30 days from the date of submission of a properly prepared invoice by a contractor. For amounts not paid within the required period, the government is obligated to pay interest at a rate established by the Secretary of the Treasury. The IRS will have to determine how this law interacts with the withholding requirement and whether interest paid on the withheld amount should also be subject to three-percent withholding.

    Furthermore, NRCA urges the IRS to deal with issues related to current requirements under U.S. Code Title 31, Chapter 39 § 3905, payment provisions relating to construction contracts, and specifically with the following section mandating the payment structure in contracts between prime contractors and subcontractors:

    "(b)(1), a payment clause which obligates the prime contractor to pay the subcontractor for satisfactory performance under its subcontract within 7 days out of such amounts as are paid to the prime contractor by the agency under such contract; and
    (2) an interest penalty clause which obligates the prime contractor to pay to the subcontractor an interest penalty on amounts due in the case of each payment not made in accordance with the payment clause included in the subcontract pursuant to paragraph (1) of this subsection—"

  5. S Corporations. Companies structured as S corporations are generally exempt from federal income tax. Instead, an S corporation's income or loss is divided among and passed through to its shareholders who then report the income or loss on their own individual income tax returns, assuming any tax liability. The IRS must develop withholding regulations that take this into account and deal specifically with S corporations.
NRCA appreciates the opportunity to submit comments and thanks the IRS in advance for giving careful consideration to our views on this important regulatory issue.


Nick Tindall
Director of Public Affairs

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