Little known legislation takes federal contractors by surprise.

Last May, during negotiations between the House and Senate on the Tax Reconciliation Act of 2006, a provision was "slipped in" the final legislation that was not part of the original House or Senate bill, nor was it ever debated in either chamber. The provision, Section 511 of Public Law 109-222, mandates that federal, state and local governments withhold 3 percent from all payments for goods and services beginning in 2011.

This provision will affect payments for government contracts as well as those to any person for a service or product provided to a government entity. This far-reaching new requirement was inserted as a last-minute $7 billion revenue-raiser in the bill that was signed into law by President Bush last May. There have been no committee hearings held on this idea and its appearance in the final bill surprised many on Capitol Hill, including Sen. Larry Craig, R-Idaho, who introduced legislation, S.2821, to repeal Section 511.

That bill died with the last Congress partly because the implementation date was not until 2011 and the crush of passing other legislation at the end of the year.

Unless repealed sooner, section 511 will not be effective until Jan. 1,2011. However, under new rules in Congress to pay for any additions to authorization and appropriations measures, there have already been efforts to accelerate the implementation date and talk of raising the 3 percent to 6 percent. If implemented, the requirement of Section 511 will have a significant impact on the defense industry, especially small businesses.

Currently, Section 511 is estimated to "increase" revenue by $7 billion from 2012 to 2015, but raises $6 billion of that amount due solely to accelerated tax receipts and not an actual revenue increase from improved tax compliance.

In addition, Section 511 is based on revenues from government payments with no relationship to a company's taxable income and therefore unrelated to any tax liability. Section 511 hurts honest taxpaying businesses without providing any additional enforcement mechanisms for tax delinquencies. Section 511 will also significantly impede the cash flow of small business.

Companies of all sizes--but particularly small businesses who are awarded large value government contracts--may see significant amounts of their operating funds become unavailable for periods that could exceed 16 months. For example, on a contract valued at $10 million, $300,000 would be withheld.

The cost to federal, state and local governments to administer and implement Section 511 will be substantial. The withholding will be particularly painful for start-up companies that are commonly operating in the red and therefore have no profit or tax liability.

Companies with a high percentage of government business will be at a competitive disadvantage relative to companies with a lower percentage of their revenue coming from government payments. More of their revenue stream will be tied up in withheld payments, leaving less free cash for operating expenses.

NDIA is a member of the Government Withholding Relief Coalition, (GWRC) a group of about 60 associations and interest groups that have been actively engaged in trying to educate the Congress to the harmful effects Section 511 will have on all businesses, large, medium and small. For further information on the GWRC, go to: www.withholdingrelief.com

Changes in the Uniform Code of Military Justice. During the debate last year in the Senate of the National Defense Authorization Act for Fiscal Year 2007, Sen. Lindsey Graham, R-S.C., successfully added a provision that would add four words to the current Uniform Code of Military Justice (UCMJ). The UCMJ is the law that governs all military personnel and during a declared war, government contractors. The four words added by Sen. Graham were "or a contingency operation" (Section 552 of Public Law 109-364). This change to the long-standing tenets of military law means that civilian contractors in locations such as Iraq or Afghanistan can now be subjected to a court martial or otherwise if they violate any of the existing military standards of conduct.

For example, a civilian contractor who mouths off to a commissioned officer in Iraq could conceivably be court-martialed and sentenced to prison for up to one year for violating Article 89 of the UCMJ, Disrespect toward a superior commissioned officer. But also troubling is the inclusion of the term "contingency operations." Contingency operations can take place at any time and at any place around the world and would include military operations from Kosovo to Katrina hurricane assistance. Placing government contractors under the UCMJ in nearly every current and future military operations would deny these civilians their rights under the Constitution to a trial by a jury of peers and other current protections. Implementing regulations have not been issued as yet by the Defense Department, but it is hoped that a reasonable approach to this issue be taken particularly in defining the term "contingency operations."

by Government Policy Staff

NDIA GOVERNMENT POLICY

Peter M. Steffes

Vice President,

Government Policy

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Ruth W. Franklin

Director, Procurement

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Ann Stockwell

Director, International Trade Policy

and Programs

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Chandra Burnside

Manager, Government Policy

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Meredith Kyttle

Government Policy Staff

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