Issue Brief: Withholding Requirement om Government Payments and Other General Tax IssuesUpdated April 2010
Background
Congress frequently proposes and enacts federal tax policy that has both direct and indirect implications for state and local governments. GFOA monitors the impact that the various legislative proposals and subsequent U.S. Department of Treasury regulations have on state and local governments. Areas of particular concern include the need to repeal legislation passed in 2006 that mandates governments to withhold taxes from payments made to vendors and contractors, as well as supporting items that have long been on the GFOA’s legislative agenda which could come to fruition in 2010.
Withholding Requirement on Government Payments
The 1996 Tax Increase Prevention and Reconciliation Act (TIPRA) (P.L. #109-222) contains a provision that requires all government entities that spend more than $100 million on goods and services to withhold 3% of payments to contractors and vendors and remit it to the federal government, in addition to annual reporting requirements. The measure (Section 511) is scheduled to take effect on Jan. 1, 2012 and, without repeal or significant alterations, would have a significant financial administrative impact on many large governments. The withholding requirement constitutes an unfunded mandate on state and local governments. In 2006, the Congressional Budget Office estimated the cost to state and local governments for administering this provision to be $62 million per year.
The GFOA and other state and local government organizations submitted comments to the Treasury Department, and the IRS proposed regulations in 2008 and 2009 about the many problems associated with implementing the withholding provision. While the regulations provide a favorable provision allowing any payment under $10,000 payment to be exempt from the law, many concerns remain including the fact that governments would be responsible for remitting the 3% on all payment and credit card transactions. Governments would need to complete Form 945 when remitting funds to the IRS (which would need to be deposited and reported in the “same manner as other nonwage withheld amounts, such as withholding on gambling winnings and pensions”) and Form 1099 to satisfy the reporting requirement.
The GFOA and other state and local organizations support legislation introduced in both the House and Senate that would repeal the withholding law (H.R. 275 and S. 292).
State and Local Sales Tax Deduction
Congress is working to extend the law that allows taxpayers to deduct state and local sales taxes on their federal tax returns, currently set to expire to Dec. 31, 2011. This extension is particularly important for federal taxpayers in states that do not have an income tax in order for them to claim the sales tax deduction. Taxpayers in states with an income tax may choose to deduct either income or sales taxes. Additionally, legislation to permanently extend the sales tax deduction has been introduced in the House and the Senate in a number of bills (S. 23, S. 35, H.R. 16, and H.R. 379).
Alternative Minimum Tax (AMT)
The AMT was created in the late 1960s to ensure that very high income taxpayers pay their fair share of taxes and do not abuse tax deductions. However, since Congress has not been able to permanently alter the law, it has had to increase the threshold amounts each year to avoid the unintended consequence of the AMT affecting middle-class taxpayers. Taxpayers who must pay the AMT cannot deduct state and local taxes or interest from tax-exempt private-activity bonds – and some governmental bonds - from their federal return. The ARRA included a provision that exempts the application of the AMT on private activity and governmental bonds for two years – 2009 and 2010, and the House of Representatives has acted to extend this exemption through 2011 (H.R. 4849). Additionally, legislation has been introduced that would allow permanently exempt the application of the AMT on private activity and governmental bonds (S. 138 and H.R. 425). GFOA and other state and local government organizations support these legislative efforts.
Offset Legislation for Local Taxes Due
Legislation may be reintroduced in this Congress, as it has been introduced in previous sessions that would allow local governments to notify the Treasury Department of individuals who owe past-due legally enforceable local tax obligations. The Treasury Department would then reduce the amount of an individual's federal tax refund by the amount of the outstanding debt and remit that amount to the state for transfer to the local government. GFOA and other state and local governments support these efforts.
Uniform Rates for Hotel Taxes Booked Over the Internet
Efforts to exempt hotel occupancy taxes from being collected for reservations made through an on-line vendor (e.g., Expedia, Travelocity, Hotels.com) may be introduced this Congress. Such legislation would preempt authority to implement these taxes and strip anticipated and needed revenues from local governments. Many cities have filed suit against the on-line hotel vendors for not fully remitting the amount of taxes paid by the customer and owed to the government, causing millions of dollars in losses to governments across the country. GFOA strongly opposes any federal action that would allow for this preemption.
Outlook in 2010
Congress will be working on numerous tax issues this year. GFOA along with other state and local government organizations will be calling on Congress to include provisions that are helpful to our members, most significantly the repeal of the 3% withholding law. Additionally, we will strongly oppose any efforts to preempt state and local taxing authority.
Related GFOA Public Policy Statements
GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email
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