Local governments hope to avoid side effects of federal tax order

Local governments are fighting a federal order to send the IRS 3 percent of what they owe their suppliers and contractors.

Spokane County Auditor Vicky Dalton estimates the unfunded congressional mandate, which takes effect in January, will cost the county around $100,000 in staff time for preparations.

Annual administration may cost about $17,000 in staff time, Dalton said.

She and county commissioners also fear the tax withholding will cause vendors to increase their prices to maintain their cash flow – or that some may be reluctant to do business with the county.

Gavin Cooley, chief financial officer for Spokane, shares that concern.

“People often complain about the hoops they have to jump through to do business with local government, and this just makes it worse,” Cooley said.

The withholding requirement, which was delayed a year because of complaints, was prompted by public outrage at companies that receive government payments and fail to pay taxes.

However, the Government Withholding Relief Coalition, composed of numerous industry organizations, says there are better ways to do that, such as checking for tax delinquencies before signing contracts.

Steve Robinson, president of Spokane Rock Products, said public officials’ fears of higher prices and wary vendors are well-founded. Contractors and suppliers can ill afford the disruption of their cash flow, he said.

“The way bids are going today, that’s a lot,” he said. “We’re bidding at very, very thin margins. … It’s a bad law.”

Robinson said his company will be affected as a supplier of crushed rock as well as a paving contractor and subcontractor.

Avista spokeswoman Jessie Wuerst said, “It definitely would have impact for us on our cash flows as well as administrative costs.”

Spokane County commissioners voted this week to join governments and businesses across the country in urging Congress to rescind the requirement.

Chairman Al French and Commissioner Todd Mielke plan to discuss that and other issues with the region’s congressional delegation next week in Washington, D.C.

Cooley said city officials have been lobbying federal legislators, and he thinks there is a “fairly decent likelihood” the law will be repealed.

If it isn’t, Dalton said, a full-time employee probably will have to work eight or nine months to revise the 16,000 county “vendor codes” used to track expenditures.

The county must develop a system for totaling payments to vendors that, for a variety of accounting reasons, have several identification codes. The system will have to filter out certain payments that are exempt from the federal withholding.

Adding up all the payments to a single vendor is necessary because the withholding applies only to “warrants” – the government version of a check – for $10,000 or more.

Warrants often combine several bills from a vendor, and the federal law requires the county to continue combining them as usual. Deviations to avoid the $10,000 threshold aren’t permitted.

Also, Dalton said, someone will have to work about a month each year to determine whether the withholding is required in a given year.

The law applies retroactively to federal, state and local agencies that have spent $100 million or more. For example, Spokane County has to withhold 3 percent from vendors next year because of last year’s spending.

County expenditures are close enough to the threshold that the withholdings may be a confusing and disruptive off-and-on occurrence, Dalton said. Large projects such as ongoing construction of a new sewage treatment plant can make the difference.

Cooley expects Spokane will be required to withhold for the foreseeable future.

“We’re in the bull’s-eye, and it’s not a good thing,” he said.