September 8, 1997

MEMORANDUM NO. 97-51

TO:             Chief Fiscal Officers/ Vice Chancellors

FROM:        Edward Renfrow
                  State Controller

SUBJECT: Tax Law Changes for 1997

The following are recently enacted changes made by Congress or the General Assembly that may impact your agency or university:

I. Withholding N.C. Income Tax On Payments Made to Non-resident Contractors

II. Employer Provided Educational Assistance Programs Extended

III. Electronic Funds Transfer Requirements Frozen at $50,000

IV. Contact Person: Telephone Number on 1099 Forms

V. Custom Computer Software Exempt from N.C. Sales Tax

VI. IRS to Change Reporting Requirements for Moving Expense Reimbursements in 1998

The 1997 session of the General Assembly enacted legislation requiring employers to withhold taxes from certain payments to nonresidents. Effective January 1, 1998, every payer who pays a nonresident contractor more than $600 during a calendar year must deduct and withhold income tax from compensation at a rate of 4%. The taxes the payer withholds are held in trust for the Secretary of Revenue.

Payer means a person who, in the course of their trade or business, pays a nonresident individual or a nonresident entity compensation for personal services performed in N.C. There is no exclusion from the provisions of G.S. 105-163 for State agencies or institutions!

Nonresident Contractor means either:

(a) a nonresident individual who performs personal services in N.C. for compensation other than wages,

(b) a nonresident entity that performs for compensation in N.C. services in connection with a performance, an entertainment, an athletic event, the creation of a film or television program, or the construction or repair of a building or highway.

A nonresident entity is defined as:

(a) a foreign limited liability company that has not obtained a certificate of authority from the Secretary of State;

(b) a foreign limited partnership or a general partnership formed under the laws of any jurisdiction other than N.C., unless the partnership maintains a permanent place of business in this State; or

(c) a foreign corporation that has not obtained a certificate of authority from the Secretary of State.

A payer is required to furnish duplicate copies of an annual statement to contractors who have had taxes withheld. The written statement must show the following and is due by January 31 of the following year:

1. The payers name, address, and taxpayer identification number.

2. The contractors name, address, and taxpayer identification number.

3. The total amount of compensation paid during the calendar year.

4. The total amount deducted under this law during the calendar year.

If a payer does not withhold from payments made to a nonresident corporation or a non-resident limited liability company because the entity has obtained a certificate of authority from the Secretary of State, the payer must obtain from the entity its corporate identification number issued by the Secretary of State. Please note, this is not the same as a Federal Identification Number. If the payer does not withhold from an individual because the individual is a resident, the payer must obtain the individuals address and social security number. If the payer does not withhold from a partnership because the partnership has a permanent place of business in this State, the payer must obtain the partnerships address and taxpayer identification number. This is the Federal Identification Number of the Partnership. The above information must be retained by the payer for audit purposes.

The Secretary of Revenue is expected to send out detailed instructions on nonresident withholding in late October. The OSC is presently working on changes to the NCAS to comply with the provisions of G.S. 105-163. Other State agency/university accounting systems directly paying nonresidents contractors and reportable nonresident entities will need to modify these systems to be in compliance as of January, 1998.

II. Employer Provided Educational Assistance Programs Extended

The exclusion for employees for employer-provided educational assistance has been extended by Congress. Expenses paid by an employer for courses beginning before June 1, 2000, are excludable from the employees income. The excludable amount of tuition, fees, and related expenses is limited to $5,250 per individual per year. Expenses for graduate-level courses remain ineligible for the exclusion.

III. Electronic Funds Transfer Requirements Frozen at $50,000

The U.S. Treasury Department is canceling requirements that taxpayers whose tax deposits total between $20,000 and $50,000 in 1999 must transfer payment of these taxes using the electronic funds transfer system. Small payroll systems can continue to deposit using the Form 8109 deposit coupons.

IV. Contact Person: Telephone Number on 1099 Forms

The 1997 instructions for 1099 forms indicate that payers should include on statements to recipients the telephone number of a person to contact. On the official IRS forms, this number is included on the filer name and address area on the statements to recipients. However, on substitute forms, payers are permitted to include the phone number on any conspicuous place on the statements. 1997 1099 Forms run off the NCAS will contain the phone number for OSC- Help Desk.

V. Custom Computer Software Exempt from N.C. Sales Tax

Effective October 1, 1997, custom computer software is exempt from North Carolina sales and use tax. Formerly, custom computer software was nontaxable as an exclusion from the definition of tangible personal property.

Custom computer software means software written in accordance with the specifications of a specific customer, including a user manual or other documentation that accompanies the sale of the software. The term does not include prewritten software that can be installed and executed with no changes to the softwares source code other than changes made to configure hardware or software.

The term tangible personal property is redefined to include computer software delivered on a storage medium, such as a CD-ROM, disk, or tape. Formerly, the definition distinguished canned software, custom software, and basic operational or control programs to determine taxability.

VI. IRS to Change Reporting Requirements for Moving Expense Reimbursements in 1998

Present tax law requires employers to give their employees a statement showing a detailed breakdown of reimbursements or payments of moving expenses. The employer may use Form 4782, Employee Moving Expense Information, for this purpose, or use their own form as long as it provides the same information. IRS Announcement 97-77, I.R.B. 1997-33, August 11, 1997, states that the IRS will eliminate this form after the 1997 tax filing year. Effective for tax year 1998, the IRS will also change the reporting of moving expenses reimbursements by employers to employees on Form W-2.

With the elimination of Form 4782, the IRS is further simplifying the reporting of qualified moving expenses on Form W-2. For 1998 reporting the following W-2 changes are applicable:

1. Qualified moving expenses an employer pays to a third party on behalf of the employee (e.g. to a moving company) and services that an employer furnishes in kind to an employee will not be reported at all on the W-2.

2. Qualified moving expense reimbursements paid directly to an employee will be reported in block 13 of Form W-2 and will be identified using a Code P. (Currently all qualified moving expense reimbursements are identified with Code P, regardless of whether or not they are paid directly to the employee.)

3. Other moving expense reimbursements (so called non-qualified expenses), whether or not paid directly to a third party, will continue to be included on wages (Form W-2, block 1) and are subject to payroll and income tax withholding.

Should you have questions concerning the above, please call Randy Thomas at (919) 981-5488. Thank you for your attention to these matters.

ER/rt