On May 17, 2007, Maryland Governor Martin O’Malley signed into law House Bill 1143, repealing the requirement that general contractors with contracts of $500,000 or more must withhold 3% of their contract price from nonresident subcontractors with subcontracts of $50,000 or more.

Working with Delegate Kumar Barve of Montgomery County and on behalf of the DC Metropolitan Subcontractors Association, Mechanical Contractors Association and National Electrical Contractors Association, Ober|Kaler’s Government Relations Group was able to persuade the General Assembly that an outright repeal of the requirement would actually benefit the state. Ober|Kaler successfully argued that the meager results of the withholding requirement did not justify the very real administrative burden that the program placed on Maryland’s construction industry.

Under the terms of House Bill 1143, the repeal of the withholding requirement is only applicable to contracts signed on or after July 1, 2007. The withholding requirement continues for contracts signed prior to July 1, 2007, even if the final payments to a subcontractor occur months or even years after July 1, 2007. The contract date for determining the withholding is the date of each subcontract of $50,000 or more and, not the date of the general contract of $500,000 or more to which the subcontract may relate.

Because the tax withholding requirement now only applies to contracts entered into before July 1, 2007, general contractors and potential nonresident subcontractors need to consider whether a subcontract which, in the ordinary course of events might be entered into in June, should be signed on or after July 1. If the execution of the contract can be deferred until July 1, the general contractor avoids the duty to withhold and the nonresident subcontractor avoids a payment delay and, conceivably, an unwelcome tax claim.