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Business and Policy Areas
Business and Policy Areas

Administration Supports Delay of 3% Withholding

March 25, 2011

The Obama administration is supporting a three-year delay of a controversial requirement that government entities, including public higher education institutions, withhold 3 percent on payments made for the purchase of goods and services. The requirement is currently scheduled to take effect on January 1, 2012. The provision was enacted as part of the 2005 Tax Increase Prevention and Reconciliation Act in an effort to prevent tax debt or tax avoidance by individuals and companies receiving payments from government purchasers. The law requires federal, state, and local governments, including public colleges and universities, with more than $100 million in annual expenditures to withhold 3 percent of payments made for the purchase of goods and services in excess of $10,000.

IRS is reportedly ready to publish final rules implementing the withholding requirement. However, a recent statement by Office of Management and Budget spokeswoman Moira Mack acknowledged the need for additional time for agencies and institutions to prepare. She said that a three-year postponement of the new withholding rules would “give the agencies sufficient time to change agency financial systems, payment processes, and contract award procedures in order to implement the rule in compliance with IRS regulations.”

The new system is intended to work similarly to the withholding process for individual salaries and wages. Public colleges and universities would need to set aside 3 percent of the gross payments due to the provider of goods or services and transmit the information and funds to the IRS. At the end of the year, the amount withheld would be credited toward taxes owed by the provider of goods and services.

In April 2008, NACUBO submitted comments to IRS proposed rules voicing support for legislative repeal of the provision, while responding with a number of recommendations related to implementation of the provision.

Senators Scott Brown (R-MA) and David Vitter (R-LA) have introduced separate bills to repeal the provision. Rep. Wally Herger (D-CA) has sponsored a House version. Both bills have bipartisan support.

In addition to requiring additional withholding and reporting by government agencies and public higher education institutions, the provision will impact many contracting industries, such as defense, healthcare, construction, and transportation, that are large-scale sellers of products and services to government agencies; they will now be subject to withholding on the gross revenues from sales to public entities.

NACUBO continues to work with other higher education associations as well as the Government Withholding Relief Coalition on lobbying efforts supporting repeal of the measure.


Mary Bachinger
Director, Tax Policy