NRCA Supports Repeal of Withholding Tax on Government Contracts
In 2006, Congress passed the Tax Increase Prevention and Reconciliation Act of 2005.
Section 511 of that act mandates a tax withholding at a rate of 3 percent on payments
due to contractors on all government contracts worth more than $10,000 issued by
all federal and state entities, and municipal governments with expenditures of $100
million or more. This tax was scheduled to take effect in 2011, but implementation
has been delayed to Jan. 1, 2013. The original goal of the withholding was to collect
underreported tax revenues and increase tax compliance by contractors. The tax originally
was projected to generate $7 billion in new revenue, which mostly is because of
the acceleration in the collection of tax receipts during the first year of implementation.
In subsequent years, only $200 million is expected to be generated.
NRCA calls on Congress to repeal this burdensome law, which amounts to little more
than a no-interest loan to the federal government. If allowed to take effect, this
tax will create cash-flow problems and a punitive contracting environment in which
it will be even more difficult for roofing contractors and other businesses to create
the jobs needed for economic recovery.
If the tax withholding law is not repealed, roofing contractors performing government
work could face serious repercussions:
- The 3 percent of the payment withheld is taken off the total value of the contract,
not the profit earned on the project.
- Given that 3 percent or less of the total contract is the average profit margin
in our industry, withholding could eliminate contractors' profits on many projects,
severely limiting the ability of contractors to grow their business and create jobs.
- Although the contractor may collect the remaining 3 percent at the end of the year,
cash-flow and operating capital disruptions caused by withholding will be a tremendous
burden, particularly for small businesses.
- Bookkeeping systems are not set up to account for amounts withheld from invoices.
Withholdings also will complicate tax filings and the need to accurately determine
tax liability. This new complexity will create added compliance costs on businesses
and further impair efforts to create jobs.
- Many roofing contractors will be forced to stop bidding on government contracts.
Also, contractors continuing to perform government work may be forced to pass additional
costs created by withholding along to the government and taxpayers.
- Without immediate action by Congress, withholding will begin affecting contractors
soon—the provision takes effect at the beginning of 2012.
NRCA urges Congress to immediately repeal the withholding tax by passing the Withholding
Tax Relief Act of 2011 (H.R. 674, S. 89, S. 164). Repeal of the withholding tax
is vital to job creation and economic growth in the roofing industry.
(October 2011)