1. Tax Reconciliation Bill H.R. 4297 Signed into Federal law on May 17, 2006 Tax Reconciliation Bill H.R. 4297 Signed into Federal law on May 17, 2006 3% Federal Mandatory Withholding State Controller’s Division - SFMS Presented by: Trudy Vidal

2. Bill Requirements  Withhold 3% tax on certain vendor payments made by government entities after 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

3. Withhold on Vendor Payments  All government entities are required to withhold  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)

4. Withhold on Vendor Payments – cont  Exceptions to Withholding: Payments for interest Payments for interest Payments for real property Payments for real property 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 Payments for classified or confidential contracts Payments for classified or confidential contracts

5. Withhold on Vendor Payments – cont  Exceptions to Withholding: Payments made by a political subdivision which pays less than $100m annually of this type payments Payments made by a political subdivision which pays less than $100m annually of this type payments Payments in connection with public assistance/welfare eligibility determined by income Payments in connection with public assistance/welfare eligibility determined by income Payments to government employees Payments to government employees Proposed regulations have dollar threshold of $10,000 per payment Proposed regulations have dollar threshold of $10,000 per payment

6. Federal Reporting Requirements  1099-MISC required to report payments and withholding  Reporting includes Corporations  Currently – 7,500 1099-MISC forms issued  Estimate – 20,000 1099-MISC forms will be issued

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

8. Technology – SFMA SFMS Responsibility  Modifications to SFMA will be extensive including but not limited to: System Management Profile – 97 screen for 3% withholding amount System Management Profile – 97 screen for 3% withholding amount Systemwide Vendor Profile – 52 screen indicator Systemwide Vendor Profile – 52 screen indicator Comptroller Object Profile – D10 screen withholding will be independent of 1099-MISC indicator Comptroller Object Profile – D10 screen withholding will be independent of 1099-MISC indicator

9. Withholding program currently only withholds for backup withholding and foreign vendor withholding Withholding program currently only withholds for backup withholding and foreign vendor withholding ACH payments currently do not allow any withholding ACH payments currently do not allow any withholding 1099-MISC reporting program 1099-MISC reporting program TIN Bulk Matching program currently only runs once a year TIN Bulk Matching program currently only runs once a year Add Electronic remittance to IRS Add Electronic remittance to IRS Technology – SFMA continued SFMS Responsibility

10. Staffing Requirements SFMS Responsibility  Add central staff for ongoing 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 manage accurate information on over 100,000 vendors Daily TIN Match with IRS to manage accurate information on over 100,000 vendors Provide notification/training/support to vendor community regarding withholding Provide notification/training/support to vendor community regarding withholding All current vendors will need modifications All current vendors will need modifications

11. 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 July 2010July 2011Jan 2012 Phase 1 Phase 2 Phase 3

12. Current Status  SCD Policy Option Package submitted for 09-11 Biennium One time funding system modifications One time funding system modifications  SCD Policy Option Package submitted for 11-13 Biennium Ongoing funding 1 FTE Ongoing funding 1 FTE Informational mailings and 1099s for about 100,000 vendors Informational mailings and 1099s for about 100,000 vendors  SFMS to train agencies and provide implementation guidance for SFMA vendors

13. What Does This Mean To Agencies  If all agency payments are made through SFMA warrants or ACH, we will handle this requirement centrally  If agencies make payments with checks through subsystems: Each agency will need to review type of payments made Each agency will need to review type of payments made Each agency may need to make system modifications, remit taxes to IRS and file 1099-MISC Forms reporting withholding Each agency may need to make system modifications, remit taxes to IRS and file 1099-MISC Forms reporting withholding

14. Questions?