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March 5, 2009 - ASCE Comments - on proposed rule implementing the Internal Revenue Code Section 340(t)

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March 5, 2009  

Mr. Douglas Shulman
CC:PA:LPD:PR (REG-158747), Room 5205
Internal Revenue Service
P.O. Box 7604, Ben Franklin Station
Washington, D.C. 20044

RE: Proposed Rule on Withholding Under Internal Revenue Code Section
3402(t) [REG-158747-06]

Dear Mr. Shulman:

The American Society of Civil Engineers (ASCE) appreciates the opportunity to
comment on the proposed rule implementing the Internal Revenue Code Section
3402(t) as per Section 511 of Public Law No. 109-222. The law which mandates the
sweeping new requirement that federal, state, and local governments withhold 3% of
their payments for goods and services (the “government withholding regime”). The
effective date, initially set for January 1, 2011, was delayed by one year to January 1,
2012 by Public Law No. 111-5, the “American Recovery and Reinvestment Act of 2009”
that was signed on February 17, 2009.

The one-year delay does allow more time for regulations to be finalized, systems to be
modified, and governments and companies to prepare for implementation. While this is
somewhat helpful, the only real solution is to fully repeal this burdensome requirement.
Particularly during these extraordinary economic times, the significant financial burden
on companies and governments is grossly misplaced.

ASCE recognizes that the Internal Revenue Service (IRS) must implement all laws,
however we do not believe there is any pragmatic or rationale way to implement this
new requirement, even if done so in an extremely flexible manner by the IRS and the
rest of the federal government. The government withholding regime will impose
significant financial and resource burdens on federal, state, and local entities, including
the IRS. The government withholding regime will significantly increase costs to
governments and will directly impact the ability of governments to maintain competition
and receive the best value for the taxpayer’s dollar.

ASCE was founded in 1852 and is the country's oldest national civil engineering
organization. It represents more than 146,000 civil engineers individually in private
practice, government, industry, and academia who are dedicated to the advancement of
the science and profession of civil engineering. ASCE is a non-profit educational and
professional society organized under Part 1.501(c) (3) of the Internal Revenue Code.

While ASCE and others work with Congress to repeal this requirement, we urge the
Internal Revenue Service (IRS) to move, with all deliberate speed, to finalize these
regulations without unjustly compromising a thorough review of the impact of each
provision in the rule. We urge the IRS to utilize as much flexibility as possible when
interpreting the legislation and developing a final rule. We would also urge the IRS to
remain open and flexible to modifications to any final rule to take into account issues
that may arise during implementation. The execution of this law is extremely
complicated and numerous unintended consequences are bound to develop, which may
instigate a need for quick, changes in the future.

Threshold Limits - ASCE strongly supports the IRS proposal to implement a threshold
below which payments would not be subject to the withholding requirement. In addition,
the threshold amount should be indexed to inflation (or another appropriate measure to
ensure “round” numbers) to preserve its utility over time. This is a common practice in
many areas and we strongly urge that the threshold not be a static number that would
then necessitate regular increases in the future.

Flow Down to Subcontractors – ASCE appreciates the IRS's consideration of
complex contracting relationships in excluding payments to subcontractors from the
withholding requirement. Contracting officers and the IRS cannot regulate and ensure
that subcontractors would be credited for funds withheld from them by prime
contractors. The law on its face pertains to prime contracts only since the government's
contract is with the prime contractor. Flowing down the additional costs may very well
be prohibited under terms of Federal Prompt Payment laws, the FAR clauses, and other
federal statutes.

The compliance burden for many companies would be extremely high if it were required
by law to withhold these payments on all its payments to subcontractors. In fact, it would
be like creating a payroll department for non-employees. Currently companies do not
need to withhold on payments to non-employees and are required to issue a Form 1099
to only a limited number of vendors. For those companies with commercial and
government business, if subcontracts were not exempt, they would need to withhold
from some suppliers and not others. The cost to put in place a system to cover this
would be very high.

S-Corporations and Partnerships Should be Exempt - Proposed 31.3402(t)-5
requires government jurisdictions to withhold tax on pass-through entities such as
partnerships, limited liability companies (treated as partnerships), and S-Corporations,
even though they are not taxpaying entities. This requirement imposes a substantial
additional administrative and compliance burden on pass-through entities. In addition,
this action could cause unforeseen taxable events to the owners if the distribution is in
excess of their basis in the pass-through entity. In light of these additional costs and
risks, we recommend that the proposed regulations exclude the withholding requirement
on pass-through entities.

Once again, thank you for the opportunity for ASCE to comment on the proposed
regulations. If we can be of further assistance, please do not hesitate to contact Martin
Hight, ASCE Sr. Manager of Government Relations at 202-789-7843 or