Describing the mandate as "an administrative and record-keeping nightmare," the National Association of State Procurement Officials (NASPO) is supporting the repeal of Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222).

The federal provision, which would require that federal, state and local governments withhold 3 percent from nearly all payments for goods and services, is scheduled to go into effect on Jan. 1, 2012. The 3 percent withholding would be remitted to the federal government for income tax purposes.

NASPO has released an issue brief outlining Section 511. The brief notes that the withholding provision "will have a significant cost impact on vendors and on state and local governments."

Directors of the central purchasing offices in each of the 50 states, the District of Columbia and the U.S. territories are members of the Lexington, Ky.-based NASPO.

The goal of the provision is to reduce the amount of underpayment of federal taxes by government vendors not currently subject to withholding.

The federal government forecasts that the withholding provision will generate $7 billion in revenue between 2011 and 2015.

According to NASPO's issue brief, businesses that sell a lot to governments could be at a disadvantage, because private-sector companies are not required to withhold 3 percent on payments.

In addition, the brief notes: "The withholding is a flat percentage of revenues from government payments, which bears no relationship to companies' taxable incomes and will also restrict cash needed for day-to-day operations and investments."

"Small businesses," the brief explains, "are already lacking access to capital, and the withholding mandate will further compound this problem by limiting their operating capital and cash-on-hand."

If the withholding provision takes effect, some of the steps that governments would have to take include:

  • Make programming changes to financial and accounting systems,
  • Purchase new software,
  • Register vendors,
  • Possibly hire additional staff,
  • Keep massive data files and paper reports,
  • Include additional terms and conditions in contracts, and
  • Increase contract administration.

The House approved full repeal of the 3 percent withholding last year in the ARRA stimulus bill. However, the Senate would only pass a one-year delay of the 3 percent withholding provision. With the one-year delay, the provision will go into effect Jan. 1, 2012.

Legislation to repeal the withholding mandate has been introduced in both the U.S. House of Representatives (H.R. 275) and the U.S. Senate (S. 292).

NASPO Issues Coordinator Matt Grayson told Govpro.com: "NASPO is mindful of its mission to provide education and information to our members and point out any possible negative implications (of the legislation) on state procurement. It's really up to the states themselves to determine what they want to do (and what they are able to do) from there."

Another organization with strong views on the withholding provision is the Washington-based U.S. Chamber of Commerce.

"The Chamber strongly opposes the requirement and continues to work for appeal," said Bryan Goettel, the Chamber's manager of media relations. "The Chamber runs the Government Withholding Relief Coalition that is working to repeal it."

The coalition is open to membership from government and contractor-vendor organizations. More information is available at www.withholdingrelief.com.