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<H2>Final Regulations on 3% Withholding Released</H2></TD></TR>
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<P>On May 6, 2011, the Internal Revenue Service released <A href="/app/scripts/exit.jsp?dest=http%3A%2F%2Fwww.gpo.gov%2Ffdsys%2Fpkg%2FFR-2011-05-09%2Fhtml%2F2011-10760.htm">final regulations</A> on section 3402(t) of the Internal Revenue Code (IRC). This provision provides that, for payments after Dec. 31, 2012, federal, state, and other units of government with annual payments for goods and services of $100 million or more must withhold income tax of 3% of the total payment for goods and services.</P>
<P>IRC 3402(t) was created by the Tax Increase Prevention and Reconciliation Act of 2005, and originally required withholding for covered payments after Dec. 31, 2010. The implementation was delayed one year by a later statute. The final regulations delay it one additional year, to payments made after Dec. 31, 2012.</P>
<P><STRONG>Government Entities Required To Withhold Under IRC 3402(t)</STRONG></P>
<P>The following are subject to the new requirement:</P>
<OL>
<LI>The entire U.S. government, including all federal agencies, the executive branch, the legislative branch and the judicial branch.
<LI>All states including the District of Columbia (but not including Indian tribal governments).
<LI>All political subdivisions of a state government or every instrumentality of such subdivisions unless the instrumentality makes annual payments for property or services of less than $100 million. </LI></OL>
<P><STRONG>Exception for Small Entities</STRONG></P>
<P>Subdivisions of a state, or instrumentalities of a subdivision of a state, are exempt from the withholding requirement if its total annual payments for property and services (not including wages) are less than $100 million. The proposed regulations provide a simple rule for determining whether an entity makes annual payments less than $100 million. In general the entity looks to its accounting year ending with or within the second preceding calendar year For example, if total payments for the entity’s 2011 accounting year exceed $100 million, the withholding requirement will apply in 2013.</P>
<P>Under an optional rule, an entity may average payments made during any four of the previous five accounting years ending with the accounting year ending with or within the second preceding calendar year.</P>
<P><STRONG>Payments Subject to Section 3402(t) Withholding</STRONG></P>
<P>Generally, withholding is required on all payments to all persons providing property or services to the government, including individuals, trusts, estates, partnerships, associations, and corporations. Withholding is required at the time of payment, and applies to payment in any form (cash, check, credit card or payment card). If the government entity fails to withhold the tax required under section 3402(t), it becomes liable for the payment of the tax.</P>
<P><STRONG>Payment Threshold</STRONG></P>
<P>The proposed regulations create a payment threshold of $10,000 and provide that payments below the threshold are not subject to withholding. The regulations also include an anti-abuse rule that payments of $10,000 or more may not be divided into payments of less than $10,000 solely for the purpose of avoiding the withholding requirements.</P>
<P><STRONG>Exceptions</STRONG></P>
<OL>
<LI>The proposed regulations provide the following exceptions from the withholding requirements:
<LI>Payments otherwise subject to withholding, such as wages.<BR>Payments for retirement benefits, unemployment compensation, or social security.
<LI>Payments subject to backup withholding, if the required backup withholding is actually performed.
<LI>Payments for real property, including land or completed buildings.
<LI>Payment of interest.
<LI>Payments to other government entities, foreign governments, tax exempt organizations, or Indian tribes.
<LI>Payments made under confidential or classified contracts, as described in IRC 6050M(e)(3).
<LI>Payments made by a political subdivision of a state, or instrumentalities of a political subdivision of a state that make annual payments for property of services of less than $100 million.
<LI>Public assistance payments made on the basis of need or income. However, assistance programs based solely on age, such as Medicare, are subject to the requirements.
<LI>Payments made under a government grant principally for a public purpose.
<LI>Payments to employees in connection with service, such as retirement plan contributions, fringe benefits, and expense reimbursements under an accountable plan.
<LI>Payments received by nonresident aliens and foreign corporations.
<LI>Payments in emergency or disaster situations.
<LI>Certain payment card transactions reportable under section 6050W. </LI></OL>
<P><STRONG>More Information</STRONG></P>
<P>The office of Federal, State and Local Governments (FSLG) will continue to provide information on these provisions, as it becomes available, on its website.<BR> </P></TD></TR></TBODY></TABLE></TD>
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<P style="MARGIN-RIGHT: 50px" align=right><I>Page Last Reviewed or Updated: May 18, 2011</I></P></DIV><!--stopindex-->
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