Any state or local government that spends more than $100 million in any year, not including amounts paid for salaries and benefits, is required to withhold 3% made on payments to persons providing property or services. The withholding rules do not apply to any single payment that is less than $10,000. Nor do they apply to payments to other governments or to tax exempt entities.
The IRS regulations described in Reg-151687-10 are effective for payments made after January 1, 2013. Payments made by debit, credit cards or similar payment cards are exempt since there are other regulations that deal with those items that affect the credit card companies themselves.
There is an exclusion for contracts that were existing on December 31, 2012 that are not materially modified after that date. A mere renewal of the contract does not constitute a material modification under these regulations. The exclusion gets removed after a year (that is for payments after January 1, 2014) to ease the administrative burden of trying to keep up with whether a contract was in existence at December 31, 2012 and whether it had been modified.
Please note that legislation has been introduced in Congress to repeal these regulations. Please monitor this website for further updates on the legislation.
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Please contact Duane B. Schlereth for further information.