Senate Passes Amended Bill Repealing 3% Withholding on Government Contracts

November 10, 2011

The U.S. Senate on Thursday approved a bill (H.R. 674) to repeal 3% income tax withholding on payments to vendors by federal, state and local governments. The vote was 95-0, with one senator voting “present.”

Immediately before the vote, the Senate added an amendment that would allow a tax credit to employers who hire military veterans, among other things. The amended bill now goes to back to the House for reconsideration.

In both versions, the bill would remove Sec. 3402(t), which requires withholding of 3% of payments by the federal or state governments or their instrumentalities or subdivisions (including multistate agencies) to any person for services or property. The withholding requirement was delayed by regulations issued in May (T.D. 9524) and is currently set to begin with payments made in 2013.

In February and October letters to Congress, the AICPA urged repeal of the measure, which was enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222.

The House passed the repeal Oct. 27. The House version also would amend the definition of modified adjusted gross income under Sec. 36B(d)(2), which determines eligibility for certain health care benefits and insurance coverage provisions under the Patient Protection and Affordable Care Act of 2010, P.L. 111-148. The Senate version contains a similar provision.

The Senate amendment (S. Amdt. 927) includes provisions dubbed the VOW to Hire Heroes Act of 2011 that would amend the work opportunity tax credit (WOTC) of Sec. 51 to include a credit for employers who hire certain unemployed veterans. President Barack Obama proposed this provision as part of his American Jobs Act.

The Senate amendment would also revise Sec. 6331(h)(3) to allow the IRS to impose a 100% levy against payment due to a vendor of property sold or leased to the federal government where the vendor has an unpaid federal tax liability. Under current law only vendors of goods or services are subject to the 100% levy. It also directs the Treasury Department to conduct a study on tax compliance by vendors to the federal government.

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