[House Report 112-253]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 112-253
======================================================================
REPEAL OF IMPOSITION OF 3 PERCENT WITHHOLDING ON CERTAIN PAYMENTS MADE
TO VENDORS BY GOVERNMENT ENTITIES
_______
October 18, 2011.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Camp, from the Committee on Ways and Means, submitted the following
R E P O R T
[To accompany H.R. 674]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 674) to amend the Internal Revenue Code of 1986 to
repeal the imposition of 3 percent withholding on certain
payments made to vendors by government entities, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND............................................2
A. Purpose and Summary................................... 2
B. Background and Need for Legislation................... 2
C. Legislative History................................... 2
II. EXPLANATION OF THE BILL...........................................3
A. Repeal of Imposition of Three-Percent Withholding on
Certain Payments Made to Vendors by Government Entities
(sec. 1 of the bill and sec. 3402(t) of the Code)...... 3
III.VOTES OF THE COMMITTEE............................................6
IV. BUDGET EFFECTS OF THE BILL........................................6
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......10
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED............11
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 674, reported by the Committee on Ways and
Means, provides for the repeal of the imposition of three-
percent withholding on certain payments made to vendors by
government entities, enacted in section 511(a) of the Tax
Increase Prevention and Reconciliation Act of 2005
(``TIPRA'')\1\, and amended in section 1511 of the American
Recovery and Reinvestment Act of 2009 (``ARRA'').\2\ The
amendment in ARRA changed the TIPRA effective date for this
provision from payments made after December 31, 2010 to
payments made after December 31, 2011.
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\1\Pub. L. No. 109-222 (May 17, 2006).
\2\Pub. L. No. 111-5 (February 17, 2009).
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B. Background and Need for Legislation
Originally enacted in 2006 under TIPRA, the three-percent
withholding requirement has generated considerable concern
among taxpayers and Federal, State and local government
agencies. While this current-law provision was purportedly
intended to improve tax compliance, it is now widely
acknowledged that, if allowed to take effect, this requirement
would reduce the cash flow of many cash-strapped employers and
require significant outlays to modify payment systems by
governmental entities, which would outweigh any potential
improvement in tax compliance. Indeed, as of the date of the
Committee's markup, two hundred sixty-nine Members of the House
of Representatives from across the political and ideological
spectrum had cosponsored H.R. 674, reflecting a growing
consensus that this requirement should be repealed. The Obama
Administration has acknowledged the need to address this issue
as well, calling these rules ``burdensome withholding
requirements that keep capital out of the hands of job
creators.'' Repeal of the three-percent withholding requirement
is an immediate step that Congress and the President can take
to remove a significant barrier to job creation.
C. Legislative History
Background
H.R. 674 was introduced on February 11, 2011, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up the bill on
October 13, 2011, and ordered the bill favorably reported.
Committee hearings
On February 16, 2011, the Committee on Ways and Means held
a full Committee hearing with Office of Management and Budget
Director Jacob Lew on the President's Fiscal Year 2012 Budget,
at which the three-percent withholding rule was discussed.
Additionally, in connection with its series of tax reform
hearings held throughout 2011, the Committee has received
several submissions for the record advocating for the repeal of
the three-percent withholding requirement.
II. EXPLANATION OF THE BILL
A. Repeal of Imposition of Three-Percent Withholding on Certain
Payments Made to Vendors by Government Entities (sec. 1 of the bill and
sec. 3402(t) of the Code)
Present Law
In general
Wages paid to employees, including wages and salaries of
employees or elected officials of Federal, State, and local
government units, are subject to withholding of income tax,
which employers are required to collect and remit to the
government. Withholding rates vary depending on the amount of
wages paid, the length of the payroll period, and the number of
withholding allowances claimed by the employee. The withholding
amount is allowed as a credit against the individual taxpayer's
income tax liability. It may be refunded if it is determined,
when a tax return is filed, that the taxpayer's liability is
less than the tax withheld, or additional tax may be due if it
is determined that the taxpayer's liability is more than the
tax withheld.
Certain nonwage payments also may be subject to
withholding. Such payments include pensions,\3\ gambling
proceeds,\4\ Social Security and other specified Federal
payments,\5\ unemployment compensation benefits,\6\ and
reportable payments such as dividends and interest.\7\
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\3\Payors of pensions are required to withhold from payments made
to payees, unless the payee elects no withholding. Withholding from
periodic payments is at variable rates, parallel to income tax
withholding from wages, whereas withholding from nonperiodic payments
is at a flat 10-percent rate. Sec. 3405(a), (b). Withholding at a rate
of 20 percent is required in the case of an eligible rollover
distribution that is not directly rolled over. Sec. 3405(c).
\4\Certain gambling proceeds are subject to withholding obligations
which vary depending on the form of wager or game. Sec. 3402(q)(3).
Withholding is at a flat rate based on the third lowest rate of tax
applicable to single taxpayers. As a general rule, every person making
payment of gambling winnings from a wagering transaction subject to
withholding must withhold 25 percent of such payment. Sec. 3402(q)(1).
If the winnings are payable to a nonresident alien individual or a
foreign corporation, the extent to which the payment is subject to
withholding is determined under the withholding regime generally
applicable to foreigners. Sec. 3402(q)(2).
\5\Voluntary withholding applies to specified Federal payments
which include Social Security payments, certain payments received as a
result of destruction or damage to crops, certain amounts received as
loans from the Commodity Credit Corporation, and other payments.
\6\Withholding is at a flat 10-percent rate. Sec. 3402(p)(2).
\7\A variety of payments (such as interest and dividends) are
subject to backup withholding if the payee has not provided a valid
taxpayer identification number (``TIN''). Withholding is at a flat rate
based on the fourth lowest rate of tax applicable to single taxpayers.
Sec. 3406.
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Nonbusiness income received by foreign persons from U.S.
sources is generally subject to tax on a gross basis at a rate
of 30 percent (14 percent for certain items of income), which
is collected by withholding at the source of the payment.\8\
The categories of income subject to the 30-percent tax and the
categories for which withholding is required are generally
coextensive, such that determination of the withholding tax
liability determines the substantive liability.
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\8\Secs. 1441 and 1442.
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Nonwage payments by governmental entities
Other than as described above, tax is not currently
required to be withheld from payments made by government
entities. Effective for payments made after December 31,
2011,\9\ new withholding requirements apply to certain
government payments for goods and services. Specifically,
government entities must withhold three percent of certain
payments to persons providing property or services.\10\
Government entities include the government of the United
States, every State, every political subdivision thereof, and
every instrumentality of the foregoing (including multistate
agencies). The withholding requirement applies regardless of
whether the government entity making such payment is the
recipient of the property or services. Political subdivisions
of States (or any instrumentality thereof) with less than $100
million of annual expenditures for property or services that
would otherwise be subject to withholding under this provision
are exempt from the withholding requirement.
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\9\Sec. 3402(t), which was added by section 511 of TIPRA. Pub. L.
No. 109-222. As originally enacted, its provisions were to be effective
for payments made after December 31, 2010. Section 1511 of ARRA delayed
the effective date until payments made after December 31, 2011. Pub. L.
No. 111-5. The regulations, as discussed infra, deferred the effective
date an additional year.
\10\Amounts withheld from any payment under section 3402(t) are
creditable against the income taxes of the payee. Treas. Reg. sec.
31.3402(t)-6(a). Thus, for calendar year taxpayers, taxes due on March
15 (for corporations) and April 15 (for individuals) will be reduced by
amounts withheld under section 3402. For taxpayers making estimated tax
payments, tax withheld under section 3402(t) and allowed as a credit
may be taken into account in determining estimated tax liability. For
calendar year taxpayers, section 3402(t) withholding generally would be
treated as a payment of estimated tax for the same calendar year and
liability for other payments of estimated tax for that year would be
reduced. Treas. Reg. sec. 31.3402(t)-6(c).
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Payments subject to three-percent withholding include any
payment made in connection with a government voucher or
certificate program which functions as a payment for property
or services. For example, payments to a commodity producer
under a government commodity support program are subject to the
withholding requirement.
Withholding is not required with respect to government
payments made through Federal, State, or local government
public assistance or public welfare programs for which
eligibility is determined by a needs or income test. For
example, payments under government programs providing food
vouchers or medical assistance to low-income individuals are
not subject to withholding under the provision. However,
payments under government programs to provide health care or
other services that are not based on the needs or income of the
recipients are subject to withholding, including programs where
eligibility is based on the age of the beneficiary.
Three-percent withholding is not required with respect to
payments of wages or any other payment with respect to which
mandatory (e.g., U.S.-source income of foreign taxpayers) or
voluntary (e.g., unemployment benefits) withholding applies
under present law. In addition, if taxes are actually withheld
from payments under the backup withholding rules, the three-
percent withholding provision is not applicable.
Three-percent withholding also does not apply to the
following: payments of interest; payments for real property;
payments to tax-exempt entities or foreign governments; intra-
governmental payments; payments made pursuant to a classified
or confidential contract (as defined in section 6050M(e)(3));
and payments to government employees that are not otherwise
excludable from this withholding provision with respect to the
employees' services as employees.
Under final regulations issued by the Secretary of
Treasury, the withholding (and accompanying reporting)
requirements apply to payments by government entities to any
person providing property or services made after December 31,
2012.\11\ Under these rules, a payment is subject to
withholding if it is $10,000 or more on a payment-by-payment
basis. Multiple payments by a government entity generally will
not be aggregated in applying this $10,000 limit.
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\11\ Treas. Reg. sec. 31.3402(t)-1(d)(1). The final regulations
provide an exception to the section 3402(t) withholding rules for
payments made under a written binding contract (as defined) that was in
effect on December 31, 2012, and is not materially modified. However,
if an existing contract is materially modified (i.e., the contract is
changed such that it materially affects either the payment terms of the
contract or the services or property to be provided under the contract)
after December 31, 2012, payments under the contract become subject to
section 3402(t) withholding. Treas. Reg. sec. 31.3402(t)-1(d)(2).
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Reasons for Change
The Committee understands that poor tax compliance by some
government contractors has been identified as a contributing
factor to the tax gap, or difference between the amount of tax
owed by taxpayers and the amount voluntarily paid to the IRS.
The Committee recognizes that withholding and information
reporting requirements can improve taxpayer compliance, but is
concerned that the requirement of three-percent withholding on
certain payments made to vendors by government entities is an
overly broad remedy to this tax gap problem. The Committee
believes that this withholding requirement would reduce the
cash flow to many cash-strapped employers that contract with
governmental entities, undermining job creation. The Committee
further believes that the looming implementation of this
requirement is contributing to the severe uncertainty facing
employers during this challenging economic time. Moreover, the
Committee believes that the withholding requirement imposes
substantial costs on Federal, State, and local governmental
agencies required to withhold payments, including costs to
acquire new software or pay for additional accounting services.
In addition to direct costs of implementation, the possibility
that three-percent withholding will result in increased
procurement costs at all levels of government, as small
businesses contracting with governmental entities adjust their
prices to address the changes in their cash flows, also
concerns the Committee. The Committee believes these burdens
are disproportionate when compared to the resulting improvement
in tax compliance and therefore believes that the three-percent
withholding requirement should be repealed.
Explanation of Provision
Under the proposal, section 3402(t) enacted under section
511 of TIPRA, is repealed.
Effective Date
The proposal is effective for payments made after December
31, 2011.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the votes of the Committee on Ways and Means in its
consideration of H.R. 674, ``To amend the Internal Revenue Code
of 1986 to repeal the imposition of 3 percent withholding on
certain payments made to vendors by government entities.''
The bill, H.R. 674, was ordered favorably reported by voice
vote (with a quorum being present).
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the revenue provisions
of the bill, H.R. 674 as reported.
The bill, as reported, is estimated to have the following
effects on budget receipts for fiscal years 2012-2021:
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee states further that the bill involves no new or
increased tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, October 17, 2011.
Hon. Dave Camp, Chairman,
Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 674, a bill to
Amend the Internal Revenue Code of 1986 to Repeal the
Imposition of 3 Percent Withholding on Certain Payments Made to
Vendors by Government Entities.
If you wish further details on this estimate, we will be
pleased to provide them. The staff contact is Kalyani
Parthasarathy.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure.
H.R. 674--A bill to Amend the Internal Revenue Code of 1986 to Repeal
the Imposition of 3 Percent Withholding on Certain Payments
Made to Vendors by Government Entities
H.R. 674 would repeal a requirement scheduled to take
effect under current law that government entities withhold and
deposit with the Internal Revenue Service 3 percent of certain
payments made to vendors, as a credit against the vendor's
income tax. The staff of the Joint Committee on Taxation (JCT)
estimates that enacting the legislation would reduce revenues
and thus increase federal deficits by $11.2 billion over the
2012-2021 period.
Under current law, federal, state, and local government
entities will be required to withhold 3 percent of payments to
vendors made in exchange for properties or services, beginning
on January 1, 2013. The requirement will apply only if a
government entity spends $100 million or more on all such
payments to vendors annually. Payments made on contracts in
effect on December 31, 2012, will not immediately be subject to
the requirements. Repealing this requirement would reduce
revenues by an estimated $11.2 billion over the 2012-2021
period, as shown in the following table. Because enacting H.R.
674 would affect revenues, pay-as-you-go procedures apply. (All
effects are on-budget.)
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By fiscal year, in millions of dollars--
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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021
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Estimated Revenues...................... 0 -6,065 -546 -576 -600 -627 -653 -681 -709 -738 -7,786 -11,194
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Notes: Components may not sum to totals because of rounding.
Enacting H.R. 674 would not affect direct spending. Implementing the bill, however, would have an impact on spending subject to appropriation. That
discretionary impact would be a reduction in estimated authorizations for future appropriations, but CBO has not yet completed the estimate of such
discretionary savings.
Source: Staff of the Joint Committee on Taxation.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Kalyani
Parthasarathy. The estimate was approved by Frank Sammartino.
D. Macroeconomic Impact Analysis
In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the Joint Committee on Taxation with respect to the
provisions of the bill amending the Internal Revenue Code of
1986: The effects of the bill on economic activity are so small
as to be incalculable within the context of a model of the
aggregate economy.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was a result of the Committee's
oversight review concerning the tax compliance burden on
taxpayers and on Federal, State, and local governmental
agencies that the Committee concluded that it is appropriate to
report the bill favorably to the House of Representatives with
the recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not impose
a private sector mandate or a Federal intergovernmental mandate
on State, local, or tribal governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the provisions of the bill, and states that
the provisions of the bill do not involve any Federal income
tax rate increases within the meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
staff of the Joint Committee on Taxation (in consultation with
the Internal Revenue Service and the Treasury Department) to
provide a tax complexity analysis. The complexity analysis is
required for all legislation reported by the Senate Committee
on Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
and has widespread applicability to individuals or small
businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Code and that
have ``widespread applicability'' to individuals or small
businesses, within the meaning of the rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill, and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECTION 3402 OF THE INTERNAL REVENUE CODE OF 1986
SEC. 3402. INCOME TAX COLLECTED AT SOURCE.
(a) * * *
* * * * * * *
[(t) Extension of Withholding to Certain Payments Made by
Government Entities.--
[(1) General rule.--The Government of the United
States, every State, every political subdivision
thereof, and every instrumentality of the foregoing
(including multi-State agencies) making any payment to
any person providing any property or services
(including any payment made in connection with a
government voucher or certificate program which
functions as a payment for property or services) shall
deduct and withhold from such payment a tax in an
amount equal to 3 percent of such payment.
[(2) Property and services subject to withholding.--
Paragraph (1) shall not apply to any payment--
[(A) except as provided in subparagraph (B),
which is subject to withholding under any other
provision of this chapter or chapter 3,
[(B) which is subject to withholding under
section 3406 and from which amounts are being
withheld under such section,
[(C) of interest,
[(D) for real property,
[(E) to any governmental entity subject to
the requirements of paragraph (1), any tax-
exempt entity, or any foreign government,
[(F) made pursuant to a classified or
confidential contract described in section
6050M(e)(3),
[(G) made by a political subdivision of a
State (or any instrumentality thereof) which
makes less than $100,000,000 of such payments
annually,
[(H) which is in connection with a public
assistance or public welfare program for which
eligibility is determined by a needs or income
test, and
[(I) to any government employee not otherwise
excludable with respect to their services as an
employee.
[(3) Coordination with other sections.--For purposes
of sections 3403 and 3404 and for purposes of so much
of subtitle F (except section 7205) as relates to this
chapter, payments to any person for property or
services which are subject to withholding shall be
treated as if such payments were wages paid by an
employer to an employee.]