REPEAL SECTION 511 OF TAX RECONCILIATION BILL

Today, NACM needs your help on an issue that urgently deserves your attention, collective efforts and energies.

On May 17, 2006, President Bush signed H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005 into law (Public Law 109-222). This law contains a little-known provision (section 511) that will impose 3 percent withholding tax on the value of most contracts for goods and services sold by businesses to federal and state governments as well as to local political subdivisions with contracting expenditures of $100 million or more.

This 3 percent withholding tax will impose a financial strain on all businesses that rely on sales to the government. One of the major problems with this new tax is that it is based on the value of the contract, with no relationship to companies’ taxable income. It will be especially burdensome to many small and medium sized businesses that exist on very tight cash flows and simply can’t afford this new withholding tax. Businesses are already struggling to provide quality products and services to the government at the lowest possible price. The hardship this new tax imposes affects all businesses that do business with government entities, no matter what their size.

Fortunately, there is hope that this 3 percent withholding tax can be repealed. On the same day that President Bush signed H.R. 4297 into law, Senator Larry Craig, (R-ID), introduced S. 2821, entitled the Withholding Tax Relief Act of 2006, which repeals section 511 of the law, effectively eliminating this 3 percent withholding tax.

NACM’s position on this new withholding tax is:

1. This 3 percent withholding tax will adversely impact businesses, which do not have the administrative or financial capacity to withstand this new taxing mechanism.

2. This 3 percent withholding tax is inherently unfair and potentially financially debilitating because it is not a progressive tax. It will place a proportionately higher financial burden on all businesses engaging in commerce with government. It places an undue burden on the already-squeezed cash flows of many small and medium-sized businesses.

3. This 3 percent withholding tax may force those who currently do business with federal, state and larger local governments to cease doing business with them. Such a result will lead to less competition for government business, driving up prices that the government has to pay for goods and services. This could ultimately lead to having to impose higher taxes on all taxpayers.

4. This new taxing measure could further weaken the U.S. economy, which depends a great deal on new jobs and economic growth created by the business community, including the small and medium-sized businesses that are responsible for the majority of new job creation.

We ask that those of you who intend to take action on this issue please go to http://web.nacm.org/asp_aps/three_percent.asp and enter in your contact information. By doing so, we will be able to quickly communicate with you in the future about the latest updates on our efforts to repeal this new withholding tax.

And, we urge you to fax or e-mail your U.S. Senators as soon as possible to express your support of S. 2821 (here is a sample letter). If we respond quickly, decisively and in a unified manner, we are confident the collective authority and energy of all of us will ring loudly throughout the Halls of Congress.

Let’s rally behind Senator Craig’s legislation and remove this unfair and burdensome new withholding tax! Your help will go a long way towards possibly removing this additional burden on those of us who work hard to provide products and services to all levels of government. Your interest and efforts in this campaign are deeply appreciated by the entire NACM community.

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