3% Withholding Mandate

Beginning in 2013, every federal and state government entities and any local jurisdiction with annual expenditures exceeding $100 million will be required to withhold 3% from all payments for goods and services.

This onerous requirement was buried in the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222).  Originally scheduled to take effect in 2011, Congress has twice extended the effective date of the provision by one year, but ACEC is seeking a total repeal of the mandate.

ACEC is deeply concerned about the impact and unintended consequences of this new requirement on all companies that receive contracts or other forms of government payments. The withholding mandate will apply to the total cost of the contract, not to the net revenue generated or the size of the company.

As a consequence, government agencies may see the cost for goods and services increase as firms seek to offset the impact of the three percent tax withholding mandate.

In addition, because the profit margin for engineering and construction services on public projects is often less than three percent, the new mandate creates very serious cash flow problems for companies providing vital services to government agencies and the public.

The law will also impose significant administrative costs and information reporting requirements on governments and businesses. This will be a serious concern for subchapter S-corporations and other pass-through entities because these withholdings will have to be reported to each partner in the partnership and will affect their tax liability. For state and local governments, the withholding requirement represents an unfunded mandate at a time when budgets are stretched to the limit.

ACEC is continuing to work with many other allied organizations to obtain complete repeal of the 3% withholding requirement and ACEC members should contact their members of Congress and encourage them to support the repeal effort.

This is only one of many key legislative and regulatory issues in which your national association is involved on behalf of your company.