Obama signs 3% Withholding Repeal, Job Creation Act

The legislation repeals the requirement that federal, state and large local governments begin withholding 3% of each payment of $10,000 or more to a contractor after Jan. 1, 2013.

WASHINGTON — On Nov. 21, President Barack Obama signed into law H.R. 674, the 3% Withholding Repeal and Job Creation Act, marking the first proposal from Obama's Jobs Act to be enacted. The legislation repeals the requirement that federal, state and large local governments begin withholding 3% of each payment of $10,000 or more to a contractor after Jan. 1, 2013. It also includes the Vow to Hire Heroes Act of 2011 in which the Secretary of Veterans Affairs in collaboration with the Secretary of Labor will establish a program of retraining assistance for eligible veterans, and creates tax breaks for companies that hire jobless veterans.

The effective date of the 3% withholding law was initially set for Jan. 1, 2011, by Section 511 of the Tax Increase Prevention and Reconciliation Act, signed in May 2006. When the American Recovery and Reinvestment Act was signed into law on Feb. 17, 2009, the 3% withholding law was delayed one year to Jan. 1, 2012. On May 9, 2011, the IRS issued the final rule, delaying implementation for one year.

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This year, repealing the 3% withholding tax was a target for the Plumbing-Heating-Cooling Contractors — National Association (PHCC) and its members. Approximately 125 PHCC members met with senators and representatives about issues – one of them being the 3% withholding law – facing plumbing and HVAC companies across the country during PHCC’s Legislative Conference in May.

In a statement of administration policy from the Executive Office of the President, office of management and budget, it is noted that the repeal of the withholding requirement in H.R. 674 would reduce a burden on government contractors who otherwise comply with their tax obligations, particularly small businesses.

“The effect of the repeal of the withholding requirement would be to avoid a decrease in cash flow to these contractors, which would allow them to retain these funds and use them to create jobs and pay suppliers,” it is stated. “This would complement the Administration’s other efforts to help small businesses. Repeal of the withholding requirement would also reduce implementation costs borne by Federal and other governmental agencies.”

In regards to the President signing the repeal, PHCC president Keith Bienvenu said, "I am very pleased Congress and the President have heard our collective voice and repealed the 3% withholding tax. I'm also pleased that PHCC's national grassroots network system helped to lead the way for repeal of this unfair tax. Through e-mails, phone calls and personal visits by members from all regions of the country supporting repeal, PHCC helped stop what would have been a damaging additional tax on an industry that is still struggling from the economic downturn (and, when average profit margins are only around 3% this additional tax would have been devastating to business across the country).

"I would like to thank everyone who responded to our call and reached out to their national legislators to make the victory possible. Our industry employs professionals in every congressional district in the U.S., meaning that we can reach everyone in Congress ... that's powerful."

Mark Giebelhaus, president of Marlin Mechanical Corporation, Phoenix, said, “This is a very positive development not only for contractors but for all companies that do business with the government. In our industry, the average net profit before taxes is just 2%. If this was not repealed we would actually be showing a loss until the withheld tax was refunded, if it was ever refunded. That would cause contractors to have to borrow money to fund their cash flow, adding more expense to operating a company due to government regulations.”

According to Jo Wagner, president of CTO Inc., Harlingen, Texas, and chair of the PHCC government relations committee, this was a bill that had the industry extremely worried.

“We subcontractors already have a retained amount held from our contracts which is anywhere from 5% to 10%,” said Wagner. “What the government was going to enact was another 3% to be withheld to insure that taxes were paid by us before releasing the funds. There was no time limit on how long they could hold this money, or how many contracts with government funds would be involved with one contractor. Since what is retained is a major portion of our profit on jobs, the government was going to create extreme cash flow shortages in our industry with the additional 3%.

“Add to this the state of the economy right now in construction, and you can see that adding this tax would have been counterproductive to the government getting tax money in a timely manner,” added Wagner. “The repeal of this bill saved a lot of small firms that wouldn't have been able to sustain the added withholding, to say nothing of the confused mess it would have made of any job with federal funding.”

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