On October 26, the House of Representatives passed a bill to repeal a law that beginning in 2013 requires tax withholding of 3% of payments to vendors and contractors providing services to federal, state and local governments and their agencies.

Think of the 3% as a discount or retainage for working with the government. The cries for the repeal of the law have been widespread for quite a while now.

Patricia Thompson, chair of the AICPA’s Tax Executive Committee, said “the withholding law will likely have a pronounced (but negative) impact on government contractors with low profit margins, potentially threatening their operations due to a tightening of cash flow.”

Today, Senate Majority Leader Harry Reid said that he plans to rewrite a House-passed measure repealing a rule that governments withhold 3 percent of payments to contractors starting in 2013. Reid wants to ensure that the requirement’s repeal would apply only to government contractors that are current on their tax obligations. Now imagine if you were trying to bid on a government contract right now. Do you plan for the 3% surcharge or not?

If the Senate passes his proposal, it would then go back to the House.

Stay tuned as this one is likely to keep changing over the course of the next few weeks.