IRS Seeks Comments from Governmental Entities on New 3% Withholding Requirement

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March  20, 2008

The Internal Revenue Service (IRS) requests public comments on the new requirement for Governmental entities to withhold 3 percent on payments for goods and services (Notice 2008-38). This includes public universities and colleges. Although the new requirement is not scheduled to go into effect until January 1, 2011, five-year contracts signed in 2006 and later will be impacted.

Notice 2008-38 will be published in Internal Revenue Bulletin 2008-13 on March 31, 2008. The notice enumerates a number of specific areas on which the service agency is seeking comments related to implementation of the requirement in a number of transaction scenarios. Exceptions to the requirement include payments subject to withholding under any other provision - most notably payroll taxes, payments for interest, and real property.

NACUBO is concerned that this requirement may impose significant administrative costs on all levels of public institutions required to collect the tax. At a minimum,  the withholding requirement will require changes to be made to the accounting methods and software used by institutions.

In addition to the undue administrative burden, there is no new source of revenue to cover the increased costs of implementing withholding tax systems into accounts payable and vendor records, nor instructions on how to implement them. The requirement will also create a competitive disadvantage with the private sector, steer contractors away (particularly small business), and cause institutions to revise all contracts and awards.

Congressional Action

Two bills to repeal this withholding requirement (H.R. 1023 and S. 777) were introduced in spring 2007 and have been referred to the House Committee on Ways & Means and the Senate Finance Committee, respectively. No action on the bills has been scheduled.

Comments Encouraged

NACUBO’s Tax Council is working on comments to the IRS but they encourage individual institutions to comment on the severity of the mandate. All comments are due by April 28, 2008.

Electronic submissions: Notice.Comments@irscounsel.treas.gov. Please include "Notice 2008-38" in the subject line of any electronic communications.

NACUBO Contact: Mary Bachinger, director, tax policy