Tax Increase Prevention and Reconciliation Act of TIPRA Tax Increase Prevention and Reconciliation Act of TIPRA 3% Federal Required Withholding State Controller’s Division - SFMS Presented by: Trudy Vidal April 14, 2011

Bill Requirements  Withhold 3% tax on certain vendor payments made by government entities after December 31, 2011  ARRA of 2009 delayed implementation from December 31, 2010 to December 31, 2011  Remit these taxes to the IRS using current tax deposit rules  Report the withholding to the vendors/IRS on form 1099-MISC

IRS Section 3402(t) Required Withholding on Government Payments

Affected Government Entities  All U.S. Government agencies  All state governments (including DC, but excluding Indian tribal governments)  All subdivisions or instrumentalities of state government unless it makes annual payments of less than $100 million

Affected Vendors Subject to Withholding  Individuals  Trusts and Estates  Partnerships  Associations  Corporations

Type of Payments Affected  Payments made to any person providing any property or services  Includes any payment made in connection with voucher or certificate program  Includes payments to provide health care/other services NOT based on need or income (we will be discussing exceptions)

Exceptions to Withholding  These payments will not be subject: Payments for interest Payments for interest Payments for real property Payments for real property Payments for classified or confidential contracts Payments for classified or confidential contracts Payments for contracts in place and substantially unchanged Payments for contracts in place and substantially unchanged Payments to tax-exempt entities and foreign governments Payments to tax-exempt entities and foreign governments Payments to intra-governmental entities Payments to intra-governmental entities

Exceptions to Withholding – cont  These payments will not be subject : Payments to nonresident aliens and foreign corporations Payments to nonresident aliens and foreign corporations Payments otherwise subject to withholding Payments otherwise subject to withholding Payments subject to backup withholding if withheld Payments subject to backup withholding if withheld Payments for retirement benefits, unemployment compensation, or social security Payments for retirement benefits, unemployment compensation, or social security Payments for public assistance based on need or income (but programs based on age are included) Payments for public assistance based on need or income (but programs based on age are included)

Exceptions to Withholding – cont  These payments will not be subject : Payments to government employees in connection with service such as retirement plan contributions, fringe benefits, expense reimbursement Payments to government employees in connection with service such as retirement plan contributions, fringe benefits, expense reimbursement Payments made in emergency or disaster situations Payments made in emergency or disaster situations Payments of less than $10,000 Payments of less than $10,000 Anti-abuse rule – withholding is required if a payment is divided solely for the purpose of avoiding the withholding requirements Anti-abuse rule – withholding is required if a payment is divided solely for the purpose of avoiding the withholding requirements

Payment Cards  Interim Guidance on the Application of Section 3402(t) to Payment Card Transactions – Notice Applies to payments made by credit, debit, stored value, and other payment cards Applies to payments made by credit, debit, stored value, and other payment cards Final regulations will reserve for future guidance Final regulations will reserve for future guidance Withholding requirements will not apply to payments made by payment card until further guidance is issued Withholding requirements will not apply to payments made by payment card until further guidance is issued Will not apply for any calendar year beginning earlier than at least 18 months from the date such guidance is finalized Will not apply for any calendar year beginning earlier than at least 18 months from the date such guidance is finalized

Subcontractors  The party contracting with the government is subject to the 3% withholding  Subcontractors of the contracting part are not subject to the 3% withholding  Agents acting as payment administrators for the government are required to withhold

Federal Reporting Requirements  1099-MISC required to report payments and withholding  Reporting includes Corporations  Withholding will continue to be reported in box 4 and merchandise payments in box 3

Withholding Requirements  Withheld amounts reported on Form 945 Annual Return of Withheld Income Tax  Form 945 deposit rules apply  Governments required to withhold that fail to do so become liable for the tax

Description of Project SFMS Responsibility  Make modifications to SFMA (Statewide Financial Management Application) to calculate and appropriately withhold/report  Add one central staff to manage new withholding for SFMA  Develop new procedures to ensure accurate withholding, remitting and reporting

Withholding program currently only withholds for backup withholding and foreign vendor withholding Withholding program currently only withholds for backup withholding and foreign vendor withholding 1099-MISC reporting program to report payments not historically reportable 1099-MISC reporting program to report payments not historically reportable Large increase in number of 1099-MISC forms to file Large increase in number of 1099-MISC forms to file Add automated electronic remittance to IRS Add automated electronic remittance to IRS Technology – SFMA continued SFMS Responsibility

Staffing Requirements SFMS Responsibility  Add one central staff for ongoing SFMA management: Daily deposits reconciled and remitted to IRS Daily deposits reconciled and remitted to IRS Modifications to vendor process Modifications to vendor process Daily TIN Match with IRS to ensure accurate information on vendors Daily TIN Match with IRS to ensure accurate information on vendors Provide notification/training/support to vendor community regarding withholding Provide notification/training/support to vendor community regarding withholding Modifications to over 100,000 current vendors Modifications to over 100,000 current vendors Propose process for electronic delivery of 1099-MISC to recipients Propose process for electronic delivery of 1099-MISC to recipients Maintain website with information for vendors Maintain website with information for vendors

Project Schedule SFMS Responsiblity  Implementation Date = January 1, 2012  Phase 1 – System Modifications  Phase 2 – Transition System Profiles-Additional staffing resource  Phase 3 – Ongoing Management-Additional staffing resource July 2010July 2011Jan 2012 Phase 1 Phase 2 Phase 3

Current Status  Testing changes to the SFMA system profiles at this time  Looking at alternatives for programming the payment threshold and existing contracts exemption  Co-chairing the NASACT workgroup on 3% required withholding  Providing training/consulting with state agencies  Monitoring senate bill in Oregon for proposed state withholding