As of January, 1 2010, it has been a requirement in the state of California to withhold tax on income that was also subject to Federal backup withholding. The logic here is pretty straightforward: if the Federal government sees the need to require withholding because they were not sure if they were going to be able to collect tax in the future, why then should California not act in the same way? In addition, the state has been facing record deficits, and this was a way to increase tax receipts without actually resorting to a tax increase. The law was passed in July 2009 and was scheduled to go into effect starting in January. Of course, most were not prepared to handle the increased withholding.

At the same time as the new withholding changes, California was working to modernize their withholding reporting and reconciliation systems at the Franchise Tax Board (FTB) and introduced a new XML reporting system to be phased in over the course of 2010. In the fall of 2009, Convey received a letter from the FTB informing that we were going to be required to begin using the new system for the annual withholding reconciliation reporting due in January of 2010. The letter and subsequent conversations clarified that only some of the payers we represent were subject to starting this early, but to expect that the new system would need to be fully implemented for all payers by the first six months of 2010.

Although a change is required, the new XML system offers substantial improvement for filing activities and provides a convenient mechanism for validating the status if you’re filing electronically. If you withhold taxes for the state of California, and if have not yet been informed of your status regarding participation in the new filing regime, I recommend you consider purchasing a solution that can handle the filing for you. Because researching and implementation of a solution is a major effort, you should immediately begin the process. While searching for a solution, I also recommend that you contact the California FTB and ask for support and testing resources to help you prepare. I can say from experience that substantial testing can be required, and as long as you are making a good-faith effort, the FTB is very helpful and will work with you to ensure your compliance.

For those of you that are current Convey Taxport clients who use our Withholding Management tools or services, you will be happy to know you are compliant today and do not need to take additional steps. If you are using another third party provider, be sure to check into their support as I have known of several legacy system solutions that do not plan on expanding support to this area.

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.