A Taxing Time on the Hill for Contractors

Attention federal contractors: Be prepared to open your wallets a little wider when the IRS comes calling in the future. Two bills pending in Congress aim to tighten the screws on the finances of those doing business with Uncle Sam.

One bill, H.R. 4881, the Contracting and Tax Accountability Act of 2008, would prohibit federal agencies from awarding contracts or grants to persons or companies that have "seriously delinquent" federal tax debts. According to the Government Accountability Office, federal contractors currently owe between $5-7 billion in unpaid federal taxes. In addition, the IRS audit rate for large corporations is at a 20-year low. In a February hearing before the House Subcommittee on Government Management, Organization, and Procurement, POGO came out in favor of this bill, albeit with some suggestions that would broaden its reach.

Another bill, H.R. 5602, the Fair Share Act of 2008, would close a loophole some contractors use to avoid paying payroll taxes on employees working outside the U.S. The bill would amend the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under federal contracts as American employers responsible for paying Social Security and Medicare payroll taxes. This bill is specifically targeted at contractors like KBR, notorious for setting up subsidiaries in foreign jurisdictions like the Cayman Islands and Bermuda to take advantage of loopholes in the current laws.

At a time when the average Joe Taxpayer is struggling to make ends meet, it's encouraging to see Congress cracking down on contractors, who take so much (about $443 billion in contracting dollars last year alone) yet are, in many instances, exploiting the system to avoid paying their fair share in taxes in return.

-- Neil Gordon

UPDATE: On Thursday, May 22, the Senate passed the Fair Share Act of 2008 as part of the Heroes Earnings Assistance and Relief Tax Act of 2008 (The "HEART Act"). The Act passed the House a day earlier and now goes to the President for his signature.

Comments

[Posted on: May 22, 2008 at 02:46 PM]

Oh, Responder. Your comment is so sad.

You are afflicted with terminal confusion about the difference between revenue--funds coming in after sales--and profit, which is what is left when all costs are subtracted from revenue.

In your comment, you are clearly equating the 6-8 percent profit margin I cited with LockMart's REVENUE. "Well if you just check out the largest defense firm, Lockheed Martin, it made $42.8 BILLION IN 2007!" That's the revenue figure, not the profit figure.

So, that's you, yup, making an argumentative ass out of yourself. Check the LM annual report or any of thousands of articles about LM's 2007 results. Write a comment here about what you found. Any name or handle you choose will be fine.

You are not alone. There is a surprising number of people in the "media" and the government who don't know the difference between revenue and profit. Those people should never be let near acquisition/contracting activity, but I am afraid some are. The difference between revenue and profit is as American and as important as apple pie, and it is very important. It is the fundamental motivation of our capitalistic economy. Even Barack Obama believes in profit, but not an excessive one.

While you don't deserve complete contempt or punishment for splattering your profound ignorance all over this blog, you do deserve an education in these things. Until then, lie low on simple financial terminology and numbers. And find some materials to educate yourself. You can do it. It isn't hard.

It's secondary, but your fraud-waste-abuse allegations are not supported. But, from more than an acquaintance with how government buys and contractors deliver services and things, there is easily ten percent that could be saved by better specifications and smarter acquisitions and more competition and better oversight by the government, plus better management by contractors. While you are loaded for bear, that money dropped on the floor today is not the result of fraud, waste, and abuse--just suboptimal management by the government and by some contractors. If we really wanted to save big, we would lop off all the unneeded big programs, especially in defense, that are not needed. Please lobby Congress to begin that process. BTW, John McCain wants to cut a lot of defense acquisition waste--but that might be one of the few reasons to vote for him.

[Posted on: May 22, 2008 at 02:22 PM]

KSBR:

There are about 400,000 DOD employees, so 5% is about 20,000. The highest salary is around $140,000 per year. The average salary is around $80,000. Assuming that they don't pay 30% of salaries to taxes, 20,000 times 80,000 times 30% equals $480,000,000 per year. That is the very wost case scenario. Also, what percentage of employees government contracting firms, particularly senior managers of defense firms, pay fully or partially their taxes? There are a lot more employees in these firms than DOD employees. And also compare that to 10% of waste, fraud and abuse of $443 billion, which is $44.3 billion. So what is more important? The $44.3 billion in contract fraud, waste and abuse or $480 million?

You stated that : Publicly owned contractors make on the order of 6-8 percent on average on their government sales, of which you cited total sales around $443 billion. Well if you just check out the largest defense firm, Lockheed Martin, it made $42.8 BILLION IN 2007! That is close to 10% of the that $443 billion! And do you want me to give you the annual revenue figures for Northrop, Raytheon, etc.? So you will see that publicly owned companies make up much more than 8% of the government sales!

reference:
http://investing.businessweek.com/businessweek/research/stocks/earnings/earnings.asp?symbol=LMT

[Posted on: May 21, 2008 at 08:35 PM]

Hedley, you ignorant [SNL epithet]: you are funnier than your namesake in Blazing Saddles.
By your use of "scooping up" you sound like the original POGO post that implied that the contractors had to do nothing in return for the money. it isn't a grant. It is for work and product. BTW, what do you do to earn money, eh? [see below]
"Bilking"--prove it."
"unpleasant" consequences for not paying taxes: applies to all miscreants, or do you know a pattern that suggests contractors get some sort of pass. Are you upset that the govt checks on the tax payment behavior of its employees? Boy, I am glad the government does that. Quite an eye-opener, eh?
"less profit"???? didn't say that, Hedley. Perhaps you thought it up. We need to ask: why???
"justified"? No, we're not implying tax evasion is justified. The comment clearly supports the opposite. Forget your glasses, or is it a reading comprehension issue? A value issue, perhaps? Let us know.
Hedley: pls cool off and stop being so snide so we'll consider paying our taxes in full so that you get paid.

[Posted on: May 21, 2008 at 03:12 PM]

KSBR,

Last I checked, POGO employees weren't scooping up over $400 billion in taxpayer dollars every year while simultaneously bilking the government of over $5 billion. Furthermore, if a POGO employee, or an employee of the DOD or Treasury didn't fully pay what they owe in taxes and got caught, I can assure you the consequences wouldn't be pleasant. And why do you feel the need to mention that contractors make less profit on their government sales? Are you implying that contractors are justified in evading/avoiding taxes as a way to make up for the lower profits?

[Posted on: May 21, 2008 at 02:08 PM]

Neil Gordon,

The vast majority of taxpayers, including contractors, who pay their fair share of taxes due would support full enforcement of evaders and nonpayers.
But you go over the top when "see Congress cracking down on contractors, who take so much (about $443 billion in contracting dollars last year alone) ." You make it sound like they are receiving grants, such as what states receive to pay welfare recipients. It is as if you won't acknowledge they actually deliver things and services to earn that money, plus a not very high profit. Publicly owned contractors make on the order of 6-8 percent on average on their government sales.

You might take a look at stats on government employees tax payment performance. According to the IRS for calendar 06, 5 (five) percent of DoD employees didn't pay up or pay up fully what they owe. Treasury emps were the best in the government with only 1.25 percent in that category. Do you think 5 percent of tens of thousands of government contractors don't pay what they owe to the IRS? Should we stop paying the DoD employees who don't pay their taxes? Or shall we leave it to the (noncontractor) revenooers to get the dough? What's the tax payment performance of employees at POGO?