IRS Delays Effective Date for Section 3402(t)
Withholding Requirements on Payment Card Transactions

          In Notice 2010-91, the Internal Revenue Service (IRS) provided interim guidance on the application of the withholding requirements under Section 3402(t) of the Internal Revenue Code (Code) to payments made by payment cards, such as credit, debit and gift cards.  Code Section 3402(t) was added by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) to provide that the United States government, every state and political subdivision thereof, and every instrumentality of the foregoing making any payment to a person providing property or services must deduct and withhold from such payment a tax equal to three percent of the payment.  TIPRA contains exceptions for several types of payments, such as wages, retirement benefits and retirement plan contributions, and also exempts payments made by state or local government if that entity makes annual payments of less than $100 million.  Under TIPRA, Code Section 3402(t) originally applied to payments made after Dec. 31, 2010, but with the enactment of the American Recovery and Reinvestment Act of 2009, the effective date was amended so that the withholding requirements apply only to payments made after Dec. 31, 2011.

          After the release of proposed regulations under Code Section 3402(t), concerns were raised regarding the implementation of the withholding and related reporting requirements.  Affected governments indicated that applying Code Section 3402(t) to payment card transactions would be difficult to administer and, in many cases, duplicative of other reporting requirements.  In response to the issues raised, the Notice provides that the requirements of Code Section 3402(t) will not apply to any payment made by payment card for any calendar year beginning earlier than at least 18 months from the date the Treasury Department and the IRS issue future guidance on the matter in final regulations they are currently developing.  Thus, for payment card transactions, the rules under Code Section 3402(t) could not apply until after the 2012 calendar year. The remainder of transactions would still be subject to the Jan. 1, 2012, effective date under current guidance.

          The IRS is requesting comments on the potential application of the 3402(t) withholding and reporting requirements to payment card transactions.  Comments must be submitted by March 28, 2011, via regular mail to the Internal Revenue Service, CC:PA:LPD:RU (Notice 2010-91), Room 5203, PO Box 7604, Ben Franklin Station, Washington, D.C., 20224, or electronically to the following e-mail address: Notice.comments@irscounsel.treas.gov.

          For more information regarding Code Section 3402(t) and how it may impact your business, please contact Mary Beth Braitman, Terry Mumford, Katrina Clingerman, Lisa Harrison or the Ice Miller Employee Benefits attorney with whom you work.