A Tale of Two Tax Provisions

Congress sometimes passes legislation full of well meaning intentions, only to find the legislation does more harm than good. It happened recently with two tax provisions that, if allowed to go into effect, will cause a huge headache for small businesses, including many surveying and mapping firms. (A recent ACSM survey showed that 57.1% of respondents worked in firms with fewer than 20 employees, while 42.9% of respondents worked in firms with more than 20 people in them.)

The two tax provisions are:
  • the Form 1099 reporting requirement in last year’s Patient Protection and Affordable Care Act (P.L. 111-148) and 
  • section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) that mandates that federal, state and local governments withhold 3% of nearly all of their contract payments, Medicare payments, farm payments, and certain grants.
Together, the 1099 reporting provision and the 3% withholding provision (both due to go into effect in 2012) could put many small surveying and mapping firms out of business.

Form 1099 Reporting Provision

Essentially, section 9006 of the Patient Protection and Affordable Care Act will require all businesses and non-profit organizations to file 1099 forms for every business-to-business transaction more than $600 per year. The provision was added to help close the so-called tax gap by generating revenue to pay for the healthcare law. However, a report by the IRS’ Taxpayer Advocate Service notes that “the new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” In other words, the reporting requirement may not accomplish its intended purpose and could be an administrative nightmare for small businesses. For surveyors, every office expense or equipment purchase that totals $600 or more per year would require a separate Form 1099. Additionally, these small businesses will have to pay for the administrative costs associated with preparing and filing the many forms.

3% Withholding Provision

The 3% withholding provision is a bit more complicated. Originally set to go into effect in 2011, it was extended to 2012. The provision is aimed at collecting underreported tax revenues and increasing tax compliance. It requires a “tax” withholding at a rate of 3% on all government payments for products and services made by the federal government, state governments, and local governments with expenditures of $100 million or more.

The provision affects payments under government contracts as well as Medicare payments, farm payments, and grants to for-profit companies (e.g., invoice for $100, government only pays $97). The 3% withheld is allocated toward the company or individual’s tax liability and imposes significant administrative costs and information reporting requirements on the governments and companies. There are three primary areas for additional costs to small businesses:
  • financing costs due to the decreases in cash flow,
  • annual recurring costs for additional employees, and 
  • capital investments to modify financial systems.
Fortunately, legislation has been introduced in Congress to repeal both of these costly provisions. Repeal of the 1099 reporting provision appears to be on a fast track and may be repealed by the time you read this article. The Senate passed an amendment that repealed the provision, and the House of Representatives will consider legislation introduced by representative Dan Lungren entitled The Small Business Paperwork Mandate Elimination Act of 2011 (H.R. 4). President Obama recognized the need for repeal of the provision by calling for its repeal in his State of the Union address.

Repeal of the 3% withholding tax provision will be more difficult. A coalition of more than 100 businesses and business associations (including the ACSM and NSPS) has been working to advocate for the provision’s repeal. Similar legislation has been introduced in every Congress since 2006. This year, repeal legislation was already introduced in the Senate and the House of Representatives. Senators Scott Brown and Olympia Snowe introduced S. 164, the Withholding Relief Act of 2011 that repeals the provision in its entirety. In the House, congressmen Wally Herger and Earl Blumenauer introduced H.R. 674 to repeal the 3% withholding tax provision. They sent around a “Dear Colleague” letter recruiting support and co-sponsors of the legislation. Surveyors can help move the legislation that would repeal both of these tax bills. You can call your senator and ask him or her to support S. 164, the Withholding Relief Act of 2011 and ask your representative to support H.R. 674.

Not only is the 3% withholding provision costly to small businesses, including surveyors, but it will be costly to the various levels of government as well, through altering of existing regulations. The Internal Revenue Service issued a proposed rule on enforcement of the provision in December 2008 and is scheduled to issue a final rule to implement this counterproductive law in the near future. ACSM has long argued that many surveyors are government contractors and, as such, would be especially hard hit by the 3% withholding tax.

In his testimony before the House Committee on Small Business during a hearing entitled, Buried in Paperwork: A 1099 Update, congressman Dan Lungren said “In the current environment, it is not acceptable for us [Congress] to dismissively pass off regulatory compliance costs without assessing their real-world effects on those who produce goods and services. We do not have the luxury of thinking of the small business community as a constant variable which can easily absorb additional costs of doing business.”

Perhaps, if Congress took the time to think of the real costs their legislation has on small business before it passes the legislation, they would not have to spend time fixing costly provisions like these.

About the Author

  • Laurence Socci
    Laurence Socci
    Laurence Socci is the chief executive manager and senior lobbyist of The CLA Group, LLC, a government consulting, lobbying, and advocacy firm in Washington, D.C., specializing in representing businesses and associations. He is also the government affairs consultant for the American Congress on Surveying and Mapping (ACSM).

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