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Update on 3% Withholding Tax on Government Contractors

Last year (1) we reported that Section 511 of the "Tax Increase Prevention and Reconciliation Act of 2005" (2) amended the Internal Revenue Code to generally impose a three percent withholding tax on payments for property and services made to contractors by Federal, state, and local government agencies, effective January 2011. Currently, there are three bills pending in Congress which would either repeal this provision in its entirety, or limit its application. (3) So, this is something to continue watching, keeping in mind that implementation in both Internal Revenue Service (IRS) regulations and the Federal Acquisition Regulation (FAR) will be required, should Section 511 not be repealed.

Failing to Include Mississippi Use Tax Equals Tough Luck X 2

Where a contractor's two sole-source fixed price contracts for renovation work included FAR 52.229-4, Federal, State, and Local Taxes (Noncompetitive Contract), (4) the Armed Services Board of Contract Appeals (ASBCA) denied the contractor's appeal for an equitable adjustment for payment of Mississippi use tax, which the contractor had neglected to include in its price. (5) The contractor's sole argument to the ASBCA was that it was not bound by FAR 52.229-4 because of its own unilateral mistake in omitting Mississippi's 3.5% use tax from its total contract price. (6) The Board said this was not a clerical or mathematical error that would entitle the contractor to reformation of the contract, but rather a judgmental error, since the contract and case law placed the burden of ascertaining applicable taxes squarely on the contractor. (7)

Law Firm Has No Standing for Tax Recovery

In an interesting case raising issues of standing relating to tax recovery matters, (8) the Court of Appeals for the 9th Circuit decided whether a law firm had standing to bring an action against the United States to recover attorney's fees from monies that its client was awarded as a result of a contract settlement. (9) Previously, the firm's client had agreed with the Federal Highway Administration to a contract settlement, but the contractor never received any compensation from that settlement because the IRS requested that payment be withheld to offset the contractor's unpaid taxes. (10) The circuit court vacated the district court's summary judgment for the Government and ordered the case to be dismissed, as the trial court lacked jurisdiction to hear the law firm's case. (11)

The law firm attempted to invoke 28 U.S.C. [section] 1346(a)(1), which waives the sovereign immunity of the United States to permit suit in the U.S. District Courts for the recovery of taxes which have been erroneously collected. (12) In response, the Circuit Court pointed out that a condition of that waiver of sovereign immunity is compliance with 26 U.S.C. [section] 7422(a), which first requires the filing of an administrative claim. (13) The Circuit Court rejected the law firm's "curious" argument that section 7422(a) did not apply to them (inasmuch as it was not the taxpayer), while at the same time the law firm asserted standing under section 1346(a)(1). (14) If the court accepted the law firm's argument, it said, "we would find ourselves pointed in diametrically opposite directions with respect to nearly identical statutory language." (15)

Representations & Certifications-Tax Delinquency

In March of this year, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council published a proposed rule, which would amend FAR Parts 9 and 52 provisions covering contractor certification regarding debarment, suspension, proposed debarment, and other responsibility matters, by adding language regarding nonpayment of taxes. (16) As of the date of the writing of this article, the period for public comment had closed, and the final rule was awaiting publication.

Margaret K. Patterson

(1) Major Andrew S. Kantner et al, Contract and Fiscal Law Developments of 2006--Year in Review, ARMY LAW., Jan. 2007, at 160.

(2) Pub. L. No. 109-222, 120 Stat. 345 (2006) (codified as amended in scattered sections of 26 U.S.C.).

(3) H. R. 1023, 110th Cong. (2007) ("To repeal the imposition of withholding on certain payments made to vendors by government entities.): Withholding Tax Relief Act of 2007, S. 777, 110th Cong. (2007) repealing [section] 511 of the Tax Increase Prevention and Reconciliation Act of 2005); Small Business Tax Fairness and Simplification Act of 2007, H. R. 46, 110th Cong. (2007) (exempting specified small businesses).

(4) GENERAL SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REG. pt. 52.229-4 [hereinafter FAR]. This clause states, in para (b): "Unless otherwise provided in this contract, the contract price includes all applicable Federal, State, and local taxes and duties." Id.

(5) Ellis Envtl. Group, LC, ASBCA Nos. 54066, 54067, 07-1 BCA [paragraph] 33,551.

(6) Id. at 166,161.

(7) Id. at 166,163.

(8) Dunn & Black, P.S. v. United States, 492 F.3d 1084 (9th Cir. 2007).

(9) Id. at 1086. After terminating the contractor for default and being sued for wrongful termination, the Federal Highway Administration stipulated to an entry of judgment, without admission of liability, in favor of the contractor. Id.

(10) Id.

(11) Id. at 1093-94.

(12) Id. at 1088.

(13) Id. Section 7422(a) states, in pertinent part:
 No suit or proceeding shall be maintained in any court for the
 recovery of any internal revenue tax alleged to have been
 erroneously or illegally assessed or collected, or of any penalty
 claimed to have been collected without authority, or of any sum
 alleged to have been excessive or in any manner wrongfully
 collected, until a claim for refund or credit has been duly filed
 with the Secretary, according to the provisions of law in that
 regard, and the regulations of the Secretary established in
 pursuance thereof.

26 U.S.C. [section] 7422(a) (2000).

(14) Dunn & Black, 492 F.3d at 1088. Section 1346(a)(1) states:
 The district courts shall have original jurisdiction, concurrent
 with the United States Court of Federal Claims, of ... [a]ny civil
 action against the United States for the recovery of any
 internal-revenue tax alleged to have been erroneously or illegally
 assessed or collected, or any penalty claimed to have been
 collected without authority or any sum alleged to have been
 excessive or in any manner wrongfully collected under the
 internal-revenue laws.

28 U.S.C. [section] 1346(a)(1).

(15) Dunn & Black, 492 F.3d at 1090.

(16) See 72 Fed. Reg. 15,093 (proposed 30 Mar. 2007).
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Title Annotation:Contract and Fiscal Developments of 2007 - the Year in Review
Author:Patterson, Margaret K.
Publication:Army Lawyer
Date:Jan 1, 2008
Previous Article:Procurement fraud.
Next Article:Contingency contractor personnel.

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