Former State Comptroller Suggests Ways to Ease Burdens of Withholding Requirements for Government Entities

Best regards,

 

 

Ed Mazur

 

Edward J. Mazur

 

Senior Advisor for Governmental

 

Financial Management

 

 

1. How to apply the withholding requirements to purchases made with credit cards or other forms of payment cards;

Response: The use of governmental credit and payment cards has expanded significantly in the past two decades, at all levels of government. Although most governments have issued strong regulations regarding their use, there are occasionally well-publicized violations of the use of these cards. Attempting to add a feature to each credit or payment card that would automatically decrease the recorded charge by 3% would involve not only the governments but their individual card vendors. Unusual and non-standard communications to vendors would be required so that they would understand that they were receiving less than the gross charge. Complying governments would have to create extraordinary new systems features to both identify the vendor who was paid by the card, record the charge against the government's accounting records at the gross value, and transmit the 3% to the Treasury. Returned purchases, inappropriate use of the cards, and other unanticipated circumstances would create a very complex process, controls over which might be not possible at acceptable cost.

Suggestion: With regard to credit cards, it may be more straightforward for the IRS to impose regulations directly on credit card vendors -- rather than on the complying governments -- so that these vendors would be obligated to withhold 3% of the gross value of the transaction from flowing to the deposit account of the providers of services or property. Such credit card vendors would only have to do this for cards registered with them for government use, and where the IRS has identified the provider of services and property as not exempt from the 3% withholding requirement (see response no. 2 below) In turn the non-exempt providers of services would only have to segregate revenues received through credit cards used by governments (as distinct from private individual or corporate charge cards) so that they could reflect on their corporate tax returns that the 3% had already been reduced and collected by the credit card vendor on behalf of the Federal government. The processes of the credit card vendors, rather than of each collecting government, would be the only processes requiring IRS oversight, and it may be possible for the IRS to avoid requiring credit card vendors to track withholdings on a transaction by transaction basis if their controls are strong and uniformly applied.

2. How to apply the withholding requirements if the payee is not subject to U.S. tax;

Response: Procurement systems and procedures would have to be modified in currently unanticipated ways to collect reliable documentation on every vendor necessary to determine -- in advance -- if the payee was subject to withholding requirements. This disclosure may require previously unanticipated authority, not currently granted to state and local governments. Creation of these new systems requirements is likely to be extremely complex and expensive.

Suggestion: Rather than have each government pre-qualify, or make such determinations on a case-by-case basis, it would be more efficient for the IRS to maintain an updated file of either (a) all providers of services and property that are exempt, or, conversely, (b) all providers of services and property that are not exempt, so that the automated systems of governments required to withhold the 3% could "run" against this IRS file for the purpose of collecting the 3%. This mechanism would be similar to those currently utilized by many governments in protecting those governments from (1) issuing tax refunds, or (2) payments for goods and services to individuals or suppliers that owe past-due taxes or other receivables to the government. Accordingly, such an approach would result in a process that was far more efficient and that would promote uniformity of treatment from collecting government to collecting government.

3. How to apply the withholding requirements to partnerships and other pass-through entities in which a Government entity is a partner or owner;

Response: The reporting entity of state and local governments is defined by standards issued by the Governmental Accounting Standards Board, and generally relate to how the entities related to the primary government are (1) controlled through the appointment of Boards of Directors, or (2) represent financial burdens to the primary government. Accordingly, the most straightforward approach that the Service could take on this particular issue would be to make governments withhold the 3% for any "component unit" of the primary government whose financial statements are either "blended" into those of the primary government, or are "discretely presented." These terms will be understood by the complying governments and would ensure that all material amounts of withholdings were comprehended by the regulations.

4. How to apply the withholding requirements to Government contractors and Subcontractors;

Response: It would appear that, based on a reading of the legislative requirements, the withholding requirements would apply to contractors that provide services to Federal and other governments. Therefore, if they are not otherwise exempt, the collections would be made.

5. The application of the withholding requirements to so-called Government - Sponsored Entities;

Response: the Governmental Accounting Standards Board (GASB) has established standards defining relationships between state and local governments and organizations that may or may not be part of the government. These are challenging enough to apply without the added complexity of determining whether the described entities are for profit or non-profit and tax exempt. As noted in 2 and 3 above, the application of the withholding requirements to the described organizations would require governments to "pre-qualify or pre-define" vendors.

Suggestion: As in noted in the response to 2 above, rather than have each government pre-qualify, or make such determinations on a case-by-case basis, it would be more efficient for the IRS to maintain an updated file of either (a) all providers of services and property that are exempt, or, conversely, (b) all providers of services and property that are not exempt, so that the automated systems of governments required to withhold the 3% could routinely "run" against this IRS file for the purpose of identifying the provider from which to collect the 3%. In addition, this mechanism would make the process far more efficient and lend uniformity of treatment from collecting government to collecting government.

6. The application of the withholding requirements to de minimis payments For property or services made by affected Government entities;

Response: the proposed regulation indicates that de mininis payments are not excluded. The volume of such payments is most likely extremely large and therefore will add to the burden of state and local governments. However, the difficulty and complexity of segregating de minimis payments from larger payments would only add dramatically to the burdens placed on state and local governments.

7. When and how the withheld amounts should be transmitted to the IRS.

Response: Such payments should be transmitted and reported on a monthly basis so that month end controls can assist in ensuring that internal controls can be maintained. This may, however, create an additional interest payment obligation or burden on state and local governments based on the requirements of the Cash Management Improvement Act of 1990.

Sincerely yours,

 

 

Edward J. Mazur,

 

Senior Advisor for Governmental

 

Financial Management

 

Richmond, Virginia