Sheet metal & Air Conditioning Contractors’ National Association

Issue Briefs

Repeal of 3% Witholding on Government Contracts


 SMACNA supports repeal of Section 511 of the Tax Reconciliation Act (P.L. 109-222) requiring government to withhold 3% on all government payments for products and services effective 2012. To achieve that goal SMACNA supports language in the House passed version of the American Recovery and Reinvestment Act, HR 1 to repeal the 3% withholding requirement. The Senate passed version delays 3% withholding implementation one additional year.


 A new tax law contains requirements that federal, state, and local governments withhold 3-percent from payments for goods and services as a guard against possible business tax evasion. The law:

  • Requires tax withholdings at a rate of 3% on all government payments for products and services made by the federal government, state governments, and local governments with total annual contracts of $100 million or more;
  • Covers payments for goods and services under government contracts as well as payments to any person for a service or product provided to a government entity;
  • Imposes significant administrative costs and information reporting requirements on governments and companies
  • Estimated to provide a one-time federal revenue windfall of $6 billion solely due to accelerated tax receipts, and an additional $1 billion (total) from 2012 to 2015, from imputed improved tax compliance;

This far-reaching new requirement was part of the Tax Reconciliation Act signed by the President in May 2006. Supporters of this law argue that imposing withholding on non-wage payments made by Federal, State and local governments would reduce the so-called “tax gap,” and increase compliance by unscrupulous contractors. However, this provision focuses only on payments made by governments and is unrelated to any actual tax evasion.


  • The withholding provision harms multitudes of businesses and forces companies to provide the federal government with what is, in effect, an interest-free loan on moneys that may not owed.
  • The 3% withholding critically affects company cash flow, especially in the construction industry, where pre-tax profit margins rarely meet or exceed 3%. The withholding is based on gross revenues from contract payments, and has no relationship to a company’s actual taxable income. This is especially damaging in construction since contractors already often face a withheld percentage of progress payments due them of up to an additional 10%.
  • The costs to Federal, State, and local governments to administer the program will be substantial and the process complex if not impossible. The withholding provision is a costly unfunded mandate on state and local governments


H.R. 1 - House Passed version repeals the 3% withholding law.

H.R. 1 - Senate Passed version delays the 3% withholding law for one additional year.

Undated February 2009