Withholding rule raises worry
WASHINGTON — Mollie Miller sells rubber stamps to the state of Nevada, Clark County government and the city of Las Vegas from an office on South Valley View Boulevard. Her company, A1 Rubber Stamp and Engraving, counts on those sales for 20 percent of its business.
But Miller sees trouble on the horizon for businesses like hers that depend on government contracts.
A federal tax law that was enacted last May included a little-noticed section that requires states and sizable local governments to withhold 3 percent of their vendor payments, and send the money instead to Washington.
The law does not take effect until 2011, but already some businesses and local governments are trying to calculate its effect. Some are working to have it repealed.
Sponsors were aiming to improve tax compliance at the largest government contractors, mainly in the defense industry. But critics say the withholding will hinder small businesses and force state and local governments to make costly changes in how vendor payments are processed.
Miller said the tax will discourage companies from contracting with governments. She said it could cost her $5,000 to $15,000 in annual revenues.
Although businesses could later reclaim the withheld money, Miller said doing so will be a hassle.
“That could be someone’s bonus or a raise,” she said.
Clark County has not yet begun preparing to comply with the law, spokeswoman Jennifer Knight said.
As a government that spends more than $100 million annually on contracts for goods and services. Knight said Clark County falls under the law and would have to withhold 3 percent on a litany of payments, from construction projects to office supplies and computer equipment.
Clark County spends about $20 million a month in accounts payable transactions, and most of that would be exposed to the tax, she said.
Although the law aims at government contracts, the ones who will ultimately pay a price are taxpayers, Knight said. Companies will raise their prices to compensate for the withheld money.
“They’re (businesses) just going to increase their overhead by 3 percent to make up for the loss,” she said.
Clark County may also have to restructure the way it processes transactions, she said, which could require expensive reforms and more staff.
The tax withholding was enacted to help close the “tax gap,” the difference between what the Internal Revenue Service thinks it will collect each year and what it actually does.
The Congressional Budget Office estimated the tax will raise $7 billion over five years, with $6 billion coming in the first year.
Sen. Charles Grassley, R-Iowa, who was Senate Finance Committee chairman last year, added the withholding to a tax bill in conference committee, Senate aides said. The provision was aimed at businesses that don’t pay their taxes properly, said Chris Braddock, an associate director at the U.S. Chamber of Commerce.
Braddock said although its intent may have been limited, the bill effectively penalizes all businesses that work with government.
“This had a lot of unintended consequences,” Braddock said.
Rep. Jon Porter, R-Nev., thinks the bill could derail small businesses competing for government contracts, spokesman Matt Leffingwell said. Porter has cosponsored a bill by Rep. Kendrick Meek, D-Fla., to repeal the law.
Leffingwell said the House Ways and Means Committee, where Porter is a member, may not move on the bill for some time because the provision does not take effect for four years. But the bipartisan interest the bill has received could spark action, he said.
Rep. Shelley Berkley, D-Nev., also a Ways and Means Committee member, said she would reserve judgment on the issue until she learns more about it. She said there is time to reverse course if necessary.
The House Small Business Committee began gathering reaction at a March 22 hearing. Witnesses said the withholding tax would run aground emerging businesses vying for government contracts.
Lonnie Coleman, vice president of the Mechanical Contractors Association of America, said withholding 3 percent of payments on government contracts could mean the difference between profit and loss for smaller businesses.
“When you’re operating on very thin margins, you don’t have the ability to see that money taken out of your organization,” Coleman said.
