H. Rept. 112-253 - 112th Congress (2011-2012)
October 18, 2011, As Reported by the Ways and Means Committee

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House Report 112-253 - REPEAL OF IMPOSITION OF 3 PERCENT WITHHOLDING ON CERTAIN PAYMENTS MADE TO VENDORS BY GOVERNMENT ENTITIES




[House Report 112-253]
[From the U.S. Government Printing 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).
---------------------------------------------------------------------------

                 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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:

<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

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.)

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             By fiscal year, in millions of dollars--
                                         ---------------------------------------------------------------------------------------------------------------
                                           2012     2013      2014     2015     2016     2017     2018     2019     2020     2021   2012-2016  2012-2021
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated Revenues......................       0    -6,065     -546     -576     -600     -627     -653     -681     -709     -738     -7,786   -11,194
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.]