Tax Reconciliation Bill H.R. 4297 Signed into Federal law on May 17, 2006

1. Tax Reconciliation Bill H.R. 4297Signed 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 real property • Payments to tax-exempt entities and foreign governments • Payments to intra-governmental entities • 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 in connection with public assistance/welfare eligibility determined by income • Payments to government employees • 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 ProjectSFMS 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 – SFMASFMS Responsibility • Modifications to SFMA will be extensive including but not limited to: • System Management Profile – 97 screen for 3% withholding amount • Systemwide Vendor Profile – 52 screen indicator • Comptroller Object Profile – D10 screen withholding will be independent of 1099-MISC indicator

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

10. Staffing RequirementsSFMS Responsibility • Add central staff for ongoing management: • Daily deposits reconciled and remitted to IRS • Modifications to vendor process • Daily TIN Match with IRS to manage accurate information on over 100,000 vendors • Provide notification/training/support to vendor community regarding withholding • All current vendors will need modifications

11. Phase 1 Phase 2 Phase 3 July 2010 July 2011 Jan 2012 Project ScheduleSFMS Responsiblity • Implementation Date = January 1, 2012 • Phase 1 – System Modifications • Phase 2 – Transition System Profiles-Additional staffing resource • Phase 3 – Ongoing Management

12. Current Status • SCD Policy Option Package submitted for 09-11 Biennium • One time funding system modifications • SCD Policy Option Package submitted for 11-13 Biennium • Ongoing funding 1 FTE • 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 may need to make system modifications, remit taxes to IRS and file 1099-MISC Forms reporting withholding

14. Questions?