August 31, 2006
                                
VIA FACSIMILE and EMAIL

The Honorable Larry E. Craig
United States Senate
520 Hart Senate Office Building
Washington, DC 20510

RE: S. 2821 Withholding Tax Relief Act of 2006

Dear Senator Craig:

     I am writing to express support for your legislation, S.
2821, the Withholding Tax Relief Act of 2006 (S. 2821).  This
legislation will repeal section 511 of the Tax Increase
Prevention and Reconciliation Act of 2005 (P.L. 109-222) (TIPRA).
The withholding provision in TIPRA is a broad new requirement
mandating that federal, state and local governments withhold 3
percent from payments made for goods and services.  Small
business groups have expressed a high level of interest in S.
2821 to the Office of Advocacy (Advocacy).  Advocacy takes its
direction from small business groups which is why we are writing
this letter of support.

     Congress established Advocacy under Pub. L. 94-305 to
represent the views of small businesses before Federal agencies
and Congress.  Advocacy is an independent office within the U.S.
Small Business Administration (SBA), so the views expressed in
this letter do not necessarily reflect the views of the SBA or
the Administration.

     Section 511 of TIPRA presents significant challenges for
small entities and state and local governments.  American small
businesses operate in an environment which challenges them to be
competitive and remain profitable.  The withholding provision
will impede the cash-flow of small entities, presenting another
obstacle to their success.  Section 511 of TIPRA amounts to a tax
penalty on government contractors without a clear path for
reimbursement.  The amount of the penalty is variable; for
instance if a contract generates a small profit or no profit the
additional withholding presents serious cash management
challenges.  Additionally, the withholding provision inhibits the
efficient use of capital because it will limit funds that can be
used to reinvest in the business.

     In fiscal year 2005, the Federal government spent over $300
billion purchasing goods and services from businesses.  Purchases
from small businesses represented almost $80 billion.  Two-thirds
of the Federal government procurement falls under the Department
of Defense (DOD).  The Government Accountability Office (GAO)
issued a report entitled "DOD Payments to Small Businesses" (GAO-
006-358, May 2006).  GAO concluded that disruptions in cash flow
caused by contracting with DOD can significantly affect the day-
to-day operations of small businesses.  Adding a 3 percent tax
withholding requirement will only exacerbate the cash flow issues
already experienced by small entities seeking to do business with
the government.

     In addition to the burdens that may be imposed on small
businesses by the withholding provision, section 511 of TIPRA may
have unintended administrative costs on all levels of government
required to collect the tax.  The withholding requirement at a
minimum will require changes to be made to the accounting methods
and software used by governmental jurisdictions.  That may be why
the Congressional Budget Office described the withholding
provision as an unfunded intergovernmental mandate.

     Repealing section 511 of TIPRA will help small businesses
maintain their ability to provide goods and services to
governments at all levels.  Thank you for your efforts on behalf
of small businesses.  Advocacy looks forward to working with you
and Congress to repeal this provision.

Sincerely,
/s/
Thomas M. Sullivan
Chief Counsel for Advocacy