Businesses, Doctors, Farmers, Hospitals and Others: Taking 3% of Your Payment NOW?

By Walt Townshend, BWCC President & CEO

Remember the recently repealed 1099 reporting mandate? A similar mandate—a 3% Withholding Tax -- was inserted into Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) at the last minute. The 3% Withholding Tax will go into effect on January 1, 2013, if not repealed. If enacted, it will adversely impact thousands of businesses, farmers, doctors and hospitals, as well as state and local governments.

The U. S. Chamber (www.repealwithholdingnow.com) and the Government Withholding Relief Coalition (www.withholdingrelief.com), comprised of many hundreds of businesses and associations, write extensively about how this law will create increased costs in the millions, just for accounting alone, much less the impact because of reduced cash flow and the likely inflation of purchases to offset the 3% tax.

The onerous nature of this unfunded mandate can best be described by example. After January 1, 2013, should a covered local fire department elect to replace an outdated ambulance with a new one, 3% of the sales price of the vehicle will be withheld from the ambulance seller and sent by the local government to the IRS. In order to compensate for the loss of cash flow, this business will likely increase the cost of the vehicle, which will in turn negatively impact the local fire department’s budget. In order to track, handle and reconcile the transaction, additional paperwork and complex accounting systems will be needed by the IRS, the local government, and the ambulance seller.

As federal, state and countless local governments will be mandated to withhold 3% on their payments for many of their purchases, Medicare payments, and farm payments, this example will be multiplied many times over. Governmental entities, as well as public school systems and universities, will pay more for goods and services in addition to major construction and repairs. The tax will drive up the cost of rebuilding and repairing the nation’s deteriorating infrastructure. Local police budgets and cash-strapped businesses will be negatively impacted. Many in the medical community, already frustrated with Medicare reimbursement processes and rates, may opt to no longer accept Medicare patients due to this added burden, leading to diminished care for the elderly.

And what about purchases made by credit card? Many government purchases are made with government-issued credit cards. There is no realistic way for the government to withhold 3% on payments in this situation where the credit card company is essentially the go-between. Processing banks for purchase cards have already advised DoD and GSA that they will not change their commercial processes to execute section 511 withholdings on the behalf of DoD or any other agency. Therefore, if the 3% withholding requirement becomes effective, the federal government and state and local governments will no longer have the ability to use purchase cards, and they will have to forgo the billions of dollars in savings.


The ultimate irony of the 3% Withholding Tax is that it will cost more to implement than it is estimated to raise in new revenue. A revenue estimate of legislation to repeal the 3% Withholding Tax vastly overestimates the amount of revenue that would be “lost” without implementation, due to an accounting gimmick. The tax is estimated to “increase” revenue by $8.2 billion in its first five years but would actually bring in nearly $6 billion of that amount in the first year solely due to accelerated tax receipts and not to an actual revenue increase from improved tax compliance. Moreover, a private-sector study has estimated that the 3% Withholding Tax will cost federal, state and local governments as much as $75.2 billion in implementation costs during this same time period.

Contact your congressional representatives to let your views be known.