UPDATE: On Monday, May 9, 2011, the Internal Revenue Service issued its final regulations regarding implementation of the 3% Withholding Provision. The regulations delay implementation until January 1, 2013, providing additional time for Congress to repeal Section 511.
In 2005, Congress passed the Tax Increase Prevention and Reconciliation Act (TIPRA) (Public Law 109-222) which included a provision, Section 511, that mandates federal, state, and local governments to withhold three percent (3 %) from payments for goods and services purchased from government contractors. The law will take effect on January 1, 2012 unless it is overturned or amended. The intent of the provision was to collect taxes from delinquent government contractors.
The Armed Forces Marketing Council agrees wholeheartedly that any government contract holders should be current on their taxes. However, the provision in question applies to all contract payments whether from companies who are delinquent or those who strive to be good corporate citizens.
The AFMC is very concerned about the unintended, adverse impact Section 511 will have on military families. It is also concerned that the commissaries and exchanges, as well as the business community upon which these systems depend for goods and services, will also suffer. Some manufacturers will reluctantly absorb this reduction in cash flow. Others, particularly numerous small businesses which operate on thin margins and simply cannot afford to make what constitutes a tax-free loan to government, shall be forced to raise prices to offset the loss of current income and the systems cost associated with implementation. Inevitably, because of this legislation, military families will have to pay more for essential goods and services in the exchanges and commissary.
The imposition of 3% withholding will also make the government a far less attractive market for every company that strives to play by the rules and be responsible partners with the military resale systems. That ultimately means a supplier base far less willing to go the extra mile in terms of service, support, special price considerations, and payment terms. Commissaries and exchanges will face the cost of compliance which in turn will put needless pressure on tight budgets and contributions to military quality of life programs.
The larger implications of this legislation as far as the Defense budget is concerned must also be recognized. While CBO has stated that it will generate $6 to $7 Billion in revenue, DoD published a report stating that it will cost the department $17 Billion to create the processes for withholding along with the increased cost of doing business with its suppliers. In 2010, the House Armed Services Committee's Defense Acquisition Reform Panel called for exempting DoD from the withholding requirement due to its adverse impact on efforts to reign in military acquisition costs.
The Armed Forces Marketing Council wholeheartedly supports President Obama’s 2010 Executive Memorandum which directs that a system be put in place to provide federal departments and agencies with information on tax delinquent contractors. This Order would effectively bar such companies from doing business with the federal government while their taxes are in arrears. Stated another way, only tax compliant companies would be allowed to have government contracts. We see President’s Executive Order as a far better and more equitable method to solve the problem than Section 511.
However, if both the President’s policy and Section 511 are in effect, the result will be that only tax compliant companies will be held to the 3% withholding requirement - essentially punishing those who’ve done no wrong.
As a member of the Government Withholding Relief Coalition, the Council supports repeal Section 511 and hopes that it will be passed separately or included in a comprehensive tax legislative package.
The AFMC urges Congress to promptly review Section 511 because every federal entity, including commissaries and exchanges, will soon have to expend resources to re-program their systems and revamp their accounting processes to be ready to meet its requirements when it goes into effect on January 1, 2012. If the committee is unable to accomplish full repeal, we respectfully request that Congress exempt military family support activities and quality of life programs, as well as the Veterans’ Canteen and the Coast Guard Exchange System. These activities are indispensable benefits for military, veteran and Coast Guard families and contribute mightily to readiness and retention.