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IMPOSITION The 3 Percent Withholding Issue Presented by Ann Collett April 21, 2009.

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Presentation on theme: "IMPOSITION The 3 Percent Withholding Issue Presented by Ann Collett April 21, 2009."— Presentation transcript:

1 IMPOSITION The 3 Percent Withholding Issue Presented by Ann Collett April 21, 2009

2 TOPIC OUTLINE Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) Section 511 Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) Section 511 Purpose Purpose Effective date Effective date Applicability Applicability Opposition Opposition Concerns and issues Concerns and issues Legislation Legislation Whats next? Whats next?

3 Imposition of Withholding on Certain Payments Made by Government Entities TIPRA Section 511 of the amends Internal Revenue Code Section 3402 by adding the requirement for governments to withhold 3% on most payments for services and property procured. TIPRA Section 511 of the amends Internal Revenue Code Section 3402 by adding the requirement for governments to withhold 3% on most payments for services and property procured. Original effective date: 2011 Original effective date: 2011 Whats one bright spot in this???? Whats one bright spot in this????

4 H.R. 1 American Recovery and Reinvestment Act Section 1511 Delay in Application of Withholding Tax on Government Contractors Section 1511 Delay in Application of Withholding Tax on Government Contractors Delays the implementation of section 511 of the TIPRA to Delays the implementation of section 511 of the TIPRA to 2012.

5 What is Section 511? Purpose: To reduce the so-called tax gap and tax evasion. IRS refers to the 3% as retainage. Congress added this provision to make it more difficult for contractors to avoid paying income taxes. Purpose: To reduce the so-called tax gap and tax evasion. IRS refers to the 3% as retainage. Congress added this provision to make it more difficult for contractors to avoid paying income taxes. Per an article at govexec.com this ties back to a 2004 GAO report that DoD contractors owed about $3 billion in unpaid taxes as of Sept. 30, Per an article at govexec.com this ties back to a 2004 GAO report that DoD contractors owed about $3 billion in unpaid taxes as of Sept. 30, 2002.

6 Applicability (1) General Rule – the Government of the United States, every State, every political subdivision thereof, and every instrumentality of the foregoing (including multi-State agencies) making any payment to any person providing any property or services (including any payment made in connection with a government voucher or certificate program which functions as payment for property or services)…. (1) General Rule – the Government of the United States, every State, every political subdivision thereof, and every instrumentality of the foregoing (including multi-State agencies) making any payment to any person providing any property or services (including any payment made in connection with a government voucher or certificate program which functions as payment for property or services)…. Does not apply to a political subdivision of a State (or any instrumentality thereof) which makes less than $100,000,000 in such payments annually. Does not apply to a political subdivision of a State (or any instrumentality thereof) which makes less than $100,000,000 in such payments annually.

7 Applicability (cont.) Does not apply to: Payments that are determined by a needs or income test Payments that are determined by a needs or income test Payments of interest (proposed regulations ask what the definition of interest should be) Payments of interest (proposed regulations ask what the definition of interest should be) Payments for real property (but which definition of real property?) Payments for real property (but which definition of real property?) Payments to tax-exempt entities or foreign governments Payments to tax-exempt entities or foreign governments Payments already subject to other withholding requirements, namely payroll related Payments already subject to other withholding requirements, namely payroll related

8 How and Who is fighting this imposition on the Government side? Letter in April 2008 to the Office of the Associate Chief Counsel of the IRS in response to questions in Treasury Notice Letter in April 2008 to the Office of the Associate Chief Counsel of the IRS in response to questions in Treasury Notice Letter submitted to the Chairman, Committee on Ways and Means, U.S. House of Representatives on February 10, 2009 urging support of the full repeal of Section 511. Letter submitted to the Chairman, Committee on Ways and Means, U.S. House of Representatives on February 10, 2009 urging support of the full repeal of Section 511. Letter submitted March 10, 2009 to the IRS Commissioner providing comments on the Proposed Regulations [REG ] published in the Federal Register December 5, Letter submitted March 10, 2009 to the IRS Commissioner providing comments on the Proposed Regulations [REG ] published in the Federal Register December 5, 2008.

9 Some of the Organizations Involved in the Fight Government Finance Officers Association Government Finance Officers Association International City/County Management Association International City/County Management Association International Municipal Lawyers Association International Municipal Lawyers Association International Public Management Association for Human Resources International Public Management Association for Human Resources American Public Power Association American Public Power Association National Institute of Governmental Purchasing National Institute of Governmental Purchasing

10 Some of the Organizations Involved in the Fight (cont.) National Council on Teacher Retirement National Council on Teacher Retirement National League of Cities National League of Cities National Association of State Auditors, Comptrollers and Treasurers National Association of State Auditors, Comptrollers and Treasurers National Association of State Budget Officers National Association of State Budget Officers National Association of State Retirement Administrators National Association of State Retirement Administrators National Conference of State Social Security Administrators National Conference of State Social Security Administrators

11 State concerns Unfunded mandate Unfunded mandate States taking on burden of collecting more taxes for the federal government States taking on burden of collecting more taxes for the federal government Implementation and ongoing costs Implementation and ongoing costs Accounting systems modifications Accounting systems modifications Administrative issues Administrative issues Payment cards Payment cards Determination of who it doesnt apply to Determination of who it doesnt apply to Effect on contract competitiveness Effect on contract competitiveness Cost passed on to states from contractors Cost passed on to states from contractors

12 Points in the letter to the IRS New duties governments will face include reconciliation of withholdings and subsequent payment to the federal government, preparation of tax deposits, monitoring of agency payments, increased compliance monitoring (including training) New duties governments will face include reconciliation of withholdings and subsequent payment to the federal government, preparation of tax deposits, monitoring of agency payments, increased compliance monitoring (including training) Governments will have to field calls from vendors, essentially notify or train vendors on this requirement, have staff track down payment errors, monitor law changes. Governments will have to field calls from vendors, essentially notify or train vendors on this requirement, have staff track down payment errors, monitor law changes.

13 No $ minimum!!???? In the Treasury Notice that came out in March 2008 for public comment In the Treasury Notice that came out in March 2008 for public comment There is no statutory exception for de minimis payments for property or services made by a Government entity (or any instrumentality thereof) that is not exempt from this withholding requirement. There is no statutory exception for de minimis payments for property or services made by a Government entity (or any instrumentality thereof) that is not exempt from this withholding requirement.

14 But wait! Whats the latest? Proposed Regulations [REG ] published in the Federal Register December 5, 2008 create a payment threshold of $10,000!! This would mean the smallest amount withheld would be $300. Proposed Regulations [REG ] published in the Federal Register December 5, 2008 create a payment threshold of $10,000!! This would mean the smallest amount withheld would be $300. There is an anti-abuse rule- no splitting to get under the threshold, placing burden on the governments. There is an anti-abuse rule- no splitting to get under the threshold, placing burden on the governments. On the flip side, will payees intentionally adjust their bills to avoid withholding? This was a concern expressed in the March 10, 2009 response letter to the IRS. On the flip side, will payees intentionally adjust their bills to avoid withholding? This was a concern expressed in the March 10, 2009 response letter to the IRS.

15 Payment card issues The imposition of the 3% throws a wrench into the payment card process. The imposition of the 3% throws a wrench into the payment card process. The comment letter in April 2008 states Payments represent an aggregate of goods and services and the actual payment being made by a government is for a financial debt, not goods or services. The comment letter in April 2008 states Payments represent an aggregate of goods and services and the actual payment being made by a government is for a financial debt, not goods or services. Proposed regulations state that the government entity is liable for the withholding and reporting associated with these payments. Proposed regulations state that the government entity is liable for the withholding and reporting associated with these payments.

16 Payment card issues (cont.) In the March 10, 2009 response letter it was noted that A contracting bank is under no obligation to provide assistance to the government entity to withhold 3 percent from a payment at the point of sale. In the March 10, 2009 response letter it was noted that A contracting bank is under no obligation to provide assistance to the government entity to withhold 3 percent from a payment at the point of sale. This could force governments to prohibit the use of credit or payment cards for payments over $10,000. Currently, in TN, TEMA would be using payment cards in emergency situations and these have the potential to be large dollars. This could force governments to prohibit the use of credit or payment cards for payments over $10,000. Currently, in TN, TEMA would be using payment cards in emergency situations and these have the potential to be large dollars. The response letter requests that the IRS exempt payment and credit card transactions from the law. The response letter requests that the IRS exempt payment and credit card transactions from the law.

17 System changes The State of Tennessee is implementing a new accounting system, Edison. The State of Tennessee is implementing a new accounting system, Edison. Oracle has been asked to see if any estimates have been made to make the needed changes, as this will impact all of their customers. Oracle has been asked to see if any estimates have been made to make the needed changes, as this will impact all of their customers. In many governments, systems wont be equipped to handle withholding. In many governments, systems wont be equipped to handle withholding.

18 Who in the private sector side is opposed or concerned? Associated Builders and Contractors Associated Builders and Contractors The Associated General Contractors of America The Associated General Contractors of America Campaign for Quality Construction Campaign for Quality Construction American Farm Bureau Federation American Farm Bureau Federation American Council of Engineering Companies American Council of Engineering Companies

19 What are contractors concerns? Cash flow issues According to the Associated Builders and Contractors, 80% of contractors in the construction industry are designated as small businesses and operate on razor-thin net margins, about 2.7% on average. According to the Associated Builders and Contractors, 80% of contractors in the construction industry are designated as small businesses and operate on razor-thin net margins, about 2.7% on average. Bonding capacity could be restricted Bonding capacity could be restricted Contractors may be faced with not doing business with governments Contractors may be faced with not doing business with governments Tax liability less than the 3% withheld, in effect giving Federal government an interest free loan Tax liability less than the 3% withheld, in effect giving Federal government an interest free loan

20 Question on subcontractors One question that is cleared up in the proposed regulations is regarding payments to subcontractors. Concern had been that money flowing down from the government to the primary contractor would have to be withheld by the primary contractor. That has been addressed. One question that is cleared up in the proposed regulations is regarding payments to subcontractors. Concern had been that money flowing down from the government to the primary contractor would have to be withheld by the primary contractor. That has been addressed. The proposed regulations state that withholding under section 3402(t) applies only to payments by the government entity or its payment administrator to the prime contractor and does not apply to successive payments by the prime contractor to the subcontractors. The proposed regulations state that withholding under section 3402(t) applies only to payments by the government entity or its payment administrator to the prime contractor and does not apply to successive payments by the prime contractor to the subcontractors.

21 Contractor example Small business contractor with one government contract for $10 million. Small business contractor with one government contract for $10 million. $300,000 would be required to be withheld. $300,000 would be required to be withheld. Contractor expects to net approximately 2.5%, $250,000 after paying for supplies, subcontractors, etc. Contractor expects to net approximately 2.5%, $250,000 after paying for supplies, subcontractors, etc. Tax on that is at most 35% of the revenue, or $87,500 (35% of $250,000) Tax on that is at most 35% of the revenue, or $87,500 (35% of $250,000) Government has withheld $300,000 for $87,500 in tax liability. Government has withheld $300,000 for $87,500 in tax liability. Source: Associated General Contractors of America, Associated General Contractors of America,

22 Current Legislation to Repeal H.R. 275 introduced 1/7/09 H.R. 275 introduced 1/7/09 Title: To repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities Title: To repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities Status: referred to the House Committee on Ways and Means Status: referred to the House Committee on Ways and Means 13 cosponsors, including Marsha Blackburn of Tennessee 13 cosponsors, including Marsha Blackburn of Tennessee Related bill –S. 292 Related bill –S. 292 Status: Pending in the Committee on Finance Status: Pending in the Committee on Finance

23 What can you do? Read the letters on the NASACT website. They provide excellent coverage on the issues involved and provide great insight on what governments are facing. Read the letters on the NASACT website. They provide excellent coverage on the issues involved and provide great insight on what governments are facing. NASACT has a letter template on their website that can be used to send to Congress urging repeal. NASACT has a letter template on their website that can be used to send to Congress urging repeal. Keep informed through the NASACT and other websites. Keep informed through the NASACT and other websites. Look for more on the proposed regulations now that the comment period for responses is over. Look for more on the proposed regulations now that the comment period for responses is over.

24 What you might feel like doing!

25 What could happen between now and January 1, 2012? Congress could repeal this requirement Congress could repeal this requirement Final Regulations could be released Final Regulations could be released Governments (You) will have to get ready to implement this cumbersome requirement Governments (You) will have to get ready to implement this cumbersome requirement

26 Get ready to implement Section 511 could become the reality


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