Hearing Scheduled in House Small Business Committee

The Internal Revenue Service (IRS) issued final rules last week that delay the 3% withholding requirement on government contracts until 2013. Under this arrangement, the withholding and reporting requirements will generally apply to payments made after December 31, 2012.

Additionally, the House Small Business Committee will hold a hearing in order to more thoroughly address the 3% requirement on May 26. A repeal bill in the House, H.R. 674, originally introduced by Rep. Wally Herger (R-CA), has also garnered more than 100 cosponsors.

All of these developments, taken together, could increase the chances for a full repeal of the 3% withholding before the end of the year.

Previous attempts to delay the provision have been supported by industry as well as Congressional and Executive leaders. In March, President Barack Obama called for a three-year delay, echoing the requests of other observers who have hoped that a delay will give lawmakers more time to enact a full repeal.

The 3% withholding requirement was originally enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in 2006. It was originally scheduled to go into effect on Jan. 1, 2011, but was delayed to Jan. 1, 2012 in 2009 by the American Recovery and Reinvestment Act (ARRA), and delayed to 2013 by last week’s IRS rulemaking. Should the requirement go into effect, most transactions for goods and services with a government entity would be subject to a 3% withholding tax, kept by the governmental entity in question.

NACM has fought the enactment of this provision, which will fall disproportionately on smaller businesses, since its introduction. As a member of the Government Withholding Relief Commission (GWRC), NACM has lobbied for a full repeal and hopes Congress acts quickly to remove this unfair and potentially harmful provision from the tax code.

Stay tuned to NACM’s Credit Real-Time blog, NACM’s eNews and Business Credit magazine for future updates.

Jacob Barron, NACM staff writer

As the clock continues to tick toward 2012, many credit professionals have been asking about the 3% withholding tax, which is still set to go into effect at the end of the year on most government contracts.

The provision was tucked into the Tax Increase Prevention and Reconciliation Act (TIPRA), enacted in 2006, originally included as a means to reduce the nation’s tax gap, which is the annual difference between taxes legally owed and taxes collected, totaling about $345 billion. Essentially, the idea was that since a number of contractors that did business with the government didn’t accurately pay their tax bills, a withholding requirement would offset the revenue lost from these contractors’ non-compliance. Observers quickly noted that merchants selling to the government that were forced to comply with this new requirement would simply raise their prices, meaning the whole provision would provide zero sum gain.

The provision was originally set to go into effect on all contracts dated after December 31, 2010, but that deadline was delayed to contracts dated after December 31, 2011 by a provision in the American Recovery and Reinvestment Act of 2009, popularly known as the stimulus bill.

The details of the provision are many, and more than a little beguiling.

According to the text, the withholding requirement would apply to government entities, including states, municipalities or any instrumentality thereof, with annual procurement budgets in excess of $100 million, which would exclude a lot of local agencies in many smaller towns. It would also only apply to purchases worth more than $10,000, and according to the Internal Revenue Service (IRS), entities and businesses would not be allowed to divide payments up into two or more in order to make them exempt under the $10,000 threshold. Certain payments would be excluded, like payments of interest, for real property, to tax-exempt entities and to foreign governments, although it should be noted that “real property” does not include payments for the construction of buildings or public works. This is a fairly vague definition, so establishing which of these payments would or would not be subject to the withholding requirement could prove challenging.

IRS guidance on the subject notes that the withholding would only apply to payments made by the government entity to the prime contractor, meaning there is no flow down to subcontractors. Payments made under contracts existing prior to the December 31, 2011 effective date will not be subject to withholding.

Advocacy

NACM has opposed the 3% withholding tax since its inception, and continues to hope that lawmakers come to their senses and repeal it.

Several bills and amendments have been proposed over the course of the provision’s life that would remove it from the record, and prevent it from ever damaging the cash flow of companies that do business with local, state and federal entities. The most recent of these is an amendment, still pending at the time of this writing, to S. 493, the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) Reauthorization Act, introduced by Senators David Vitter (R-LA) and Scott Brown (R-MA). Vitter and Brown have previously introduced their own standalone repeal bills before combining them into this amendment, which would likewise eliminate the 3% withholding requirement and tell agencies and companies to act as though it were never enacted.

The issue with previous repeal efforts was that they weren’t attached to measures that would offset the revenue loss of repealing the 3% withholding; as expensive as it would be in the long run, the 3% tax would generate revenue for the government, and any repeal effort will have to include some commensurate form of spending cuts or revenue generators. Amendment 212 gets around this by rescinding $39 billion in funds appropriated but unspent by government agencies, excluding the Departments of Defense and Veterans Affairs.

“The withholding is a flat percentage of revenues from government payments, bears no relationship to companies’ taxable incomes and will restrict cash flow needed for day-to-day operations and investments,” said the Government Withholding Relief Coalition (GWRC) in a recent letter to lawmakers in support of Amendment 212. NACM is counted among the dozens of members of the Coalition, which was formed to repeal the requirement shortly after its enactment and the NACM Government Business Group (GBG) has been active in keeping its members informed of the implications and encouraging contact with respective representatives.

The letter continued, pointing out that governments and governmental entities themselves will scarcely have the resources to handle the implementation of the new requirement. “In addition, the administrative and capital investment costs that compliance with 3% withholding will impose on businesses and governments will be substantial, and the mandate will be exceedingly complicated to implement. Three percent withholding will be especially burdensome for small firms. With the withholding mandate scheduled to take effect on January 1, 2012, businesses and governments are expending limited resources now in order to make the major system and process changes needed to implement this provision. This is a particular challenge for cash-strapped state and local governments.”

For more information on the 3% withholding tax, stay tuned to NACM's Credit Real-Time blog, NACM's eNews, and Business Credit magazine.

The Obama administration, U.S. businesses and domestic analysts alike have been pining for a narrowing of the domestic trade gap. And, although just that occurred in February, the news was overshadowed greatly by statistics indicating the first decline in exporting activity in six months and a worrisome price spike on both exports and imports.

Newly unveiled Commerce Department statistics indicate that the trade gap narrowed in February to $45.8 billion from $47 billion. However, both importing and exporting activity were down, by $3.6 billion and $2.4 billion, respectively. The drop in exporting activity despite a doubling-down by the Obama administration to make trade more of a priority in recent months than in any stretch of this presidency came as an unsettling surprise to analysts and economists. The knee-jerk response from markets has been one of renewed uncertainty regarding the continued strength, or lack thereof, of what has already been considered a lackluster and disappointing economic recovery over recent months and years.

Meanwhile, Bureau of Labor Statistics numbers on import and export price indexes, also announced Tuesday, show higher fuel prices causing a surge in the cost of various products and materials worldwide. Import prices increased by 2.7% between February and March. The index for the important fuel category alone jumped 9%, the largest advance since June 2009, the bureau noted.

Export prices also increased, by 1.5%, from February to March, similar to the previous month’s uptick. Of particular interest is the continued rise in agricultural exports. Those increased another 2.3%, with spikes coming within the corn (9.2%) and cotton (10.5%) commodities. The bureau noted Ag prices has surged by 34% over the last year. Much of this is attributable to draughts and wildfire catastrophes in places such as Russia as well as supply damage caused by out-of-season freezes in some key growing areas. While the high prices are helpful for those producers who evaded crop damage and saw quality yields, the price surge certainly is a double-edged sword that could cut those in the small business exporting game deeply.

Brian Shappell, NACM staff writer

The central banks and governments for a pair of key targets in small business exporting took very different paths this week in fighting growing inflation. China’s central bank, concerned with its economy getting significantly more overheated than it already has, tried again to pump the brakes this week by raising interest rates. It’s a decidedly different track than is being taken in Brazil.

The People’s Bank of China announced it would raise its rates by 25 basis points, the second time this year it has opted to make such a move. The move was perhaps more surprising in its timing, very close to the last rate hike, than its inevitable appearance. China is contending with, among other things, an inflated housing bubble not too different from the one that propped up and eventually destroyed U.S. economic growth during the middle of the last decade. 

Brazil, acknowledging inflation is a real issue within the growing economy, in essence said it will a take a sort of wait-until-next-year approach to addressing the problem. Officials in the administration of new President Dilma Rousseff, who has a history of being leftist and pro-labor, this expressed concern and/or disinterest in making more significant efforts toward slowing down booming economic growth there. The central bank predicted it will usher in monetary policy tightening sometime in 2012 to curb inflation though, if it is playing catch up, may have to tighten significantly more than it would if addressing the issue this year.

“In fairness to the Brazilians, they do at least recognize the problem and have taken action (albeit with limited results) by raising interest rates twice since late December...policymakers in Brazil are challenged on a variety of fronts,” said Economist Byron Shoulton, of FCIA Management Co., a speaker/panelist at FCIB’s I.C.E. Conference in Chicago.

(Note: More on the varied approaches to inflation-fighing by China, Brazil and the U.S. in this week's eNews, available Thursday afternoon. For more information on or to register for the I.C.E. Conference, visit www.fcibglobal.com).

Brian Shappell, NACM staff writer

In a move designed to increase opportunities for U.S.-based exporters, Ex-Im Bank of the United States is investing in a series of infrastructure projects in new economic hotbed Brazil. 

Ex-Im, the nation’s official export credit agency, authorized $1 billion this week to help grease the wheels, so to speak, for exporting of goods and service to be used in a serious of infrastructure projects around Rio de Janiero. Among them, will be stadiums and other venues related to Brazil’s sought-after status as host to both the FIFA World Cup (soccer) and the Olympics within the next decade. The $1 billion in financing will be available for the state of Rio de Janiero to borrow to finance purchasing supplies from U.S.-based companies to complete the work.

“Brazil is an emerging economy with extensive infrastructure needs, and this authorization will provide further opportunities for American exporters and small business owners…it is important that we encourage our businesses to compete globally,” said Ex-Im Chairman/President Fed Hochberg.

Note: In-depth sessions focused on doing business in Brazil will be featured both at NACM’s 2011 Credit Congress in Nashville in May and FCIB’s 2011 I.C.E. Conference in Chicago in April. Click the highlighted links for information on each event or to register. See more on Brazil in the upcoming edition of NACM eNews, available on the afternoon of March 31.

Brian Shappell, NACM staff writer

While the Red Flags Clarification Act may have exempted a number of very specific types of small businesses, it didn't exempt all of them.

For this reason, the Federal Trade Commission's (FTC's) much-discussed, oft-delayed "Red Flags" rules went into effect with the New Year, meaning many entities need to be in compliance with the amended statute. As described by the FTC, the new law "gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces. Businesses with a high risk for identity theft may need more robust procedures-like using other information sources to confirm the identity of new customers or incorporating fraud detection software. Groups with a low risk for identity theft may have a more streamlined program-for example, simply having a plan for how they'll respond if they find out there has been an incident of identity theft involving their business."

"We're pleased Congress clarified its law, which was clearly overbroad," said FTC Chairman Jon Leibowitz. "Now we can go forward with less litigating and more protecting consumers from identity theft."

While the new legislation made the "Red Flags" rules apply to far fewer businesses, it failed to exempt trade creditors in any meaningful way. "I don't think this changes a thing for our trade creditors," said Wanda Borges, Esq. of Borges & Associates, LLC. "It's so short and almost nonsensical, I really think they accomplished very little." Specifically, Borges noted that the bill's adjustments to the definition of what constitutes a "creditor" fail to explicitly exclude trade creditors. Moreover, a provision at the end of the bill serves as something of a catch-all, noting that creditors can be required to comply with the "Red Flags" Rule if they're determined to maintain accounts subject to a reasonably foreseeable risk of identity theft.

Instead, according to Borges, the law allows businesses to better determine how at risk for identity theft they are, and how much they have to do to comply with the regulations. "They may have succeeded in eliminating the need for small law firms and small doctor's offices to have 'Red Flags' programs in place, but that catch-all at the end means our trade creditors aren't exempt," she added. "I think what it does is gives businesses a better opportunity to determine whether or not they're low risk or high risk. It's clear that they have not excluded trade credit."

NACM continues to seek further clarification from the FTC. Stay tuned to NACM's eNews and Credit Real-Time Blog for updates.

Jacob Barron, NACM staff writer

House Ways and Means Committee Chairman Predicts Repeal Action Before March

After several failed attempts in the last Congress, the Senate finally voted to repeal the controversial 1099 requirement, originally passed as part of the health care reform bill.

In a bipartisan, 81-17 vote, the Senate agreed to erase the provision that would've required small businesses to file an Internal Revenue Service form 1099 for every vendor from whom they annually buy $600 worth of goods or services. The measure was originally enacted as a revenue generator, but quickly drew the ire of small business owners and advocacy associations nationwide, eventually becoming universally reviled.

The repeal came in the form of an amendment attached to the Federal Aviation Administration (FAA) Reauthorization bill.

"Today we provided a common-sense solution for business owners so they can focus on creating jobs, not filling out paperwork for the IRS," said Sen. Debbie Stabenow (D-MI), who proposed the successful 1099 repeal amendment. "Since last year, I have worked with my colleagues on both sides of the aisle to address this problem. If left unchecked, 40 million small businesses would see their IRS 1099 paperwork increase 2000%."

Repeal efforts in the House continue, however, most recently in the form of a hearing, titled "Buried In Paperwork: A 1099 Update," held in the House Committee on Small Business. "This new 1099 requirement will cause an avalanche of additional 1099 forms to be filed, and affect over 36 million entities," said committee chairman Sam Graves (R-MO). "At a time when we should be making it easier to create jobs, promote growth and invest in our economy, small firms don't need yet another costly and burdensome mandate."

Due to the tax implications inherent in a repeal measure, any bill that eliminates the 1099 requirement will have to pass through the House's Ways and Means Committee, which has jurisdiction over the tax code, before reaching the full House for a vote. However, Ways and Means Committee Chairman Dave Camp (R-MI) has indicated that he expects his committee to take up the repeal effort before March 1, 2011.

Stay tuned to NACM's eNews and Credit Real-Time Blog for latebreaking updates on the 1099 repeal efforts.

Jacob Barron, NACM staff writer