Office of the Controller	UNIVERSITY OF NORTH CAROLINA	The University of North Carolina at Chapel Hill
Telephone: 919-962-7007	AT	CB# 1270, 440 West Franklin Street
Fax: 919-962-4140	CHAPEL HILL	Chapel Hill, NC 27599-1270
Email: Dennis-Press@unc.edu

My purpose in writing is to provide information regarding a change in the requirement to withhold NC income tax on certain payments made to nonresident (i.e. out-of-state) individuals or businesses. Nonresident businesses include out-of- state limited liability companies, partnerships, and corporations. The 1997 session of the General Assembly enacted legislation which requires withholding of NC income tax at the rate of 4% on non-wage compensation paid to nonresident individuals and businesses for personal services rendered within NC unless certain criteria are met. Please refer to the memorandum to Deans, Directors, and Department Chairs number 1814 issued December 16, 1997.

More recent legislation included a partial repeal of the NC 4% nonresident withholding tax. The withholding tax no longer applies to businesses providing construction or repairs. The withholding tax also no longer applies to all personal services performed. by individuals but rather just to certain categories of services (see below). Both of these changes are retroactive to January 1, 1998.

Another change is the threshold for the commencement of the withholding requirement that increased from $600 to $1,500 of compensation during a calendar year. Payments to nonresident individuals or businesses may originate from more than a single department. Also, calendar year-to-date payment totals cannot presently be accumulated in FRS. Therefore, for the time being, please anticipate that the 4% withholding will apply to each appropriate payment regardless of the amount. Efforts will be made to provide Accounts Payable with calendar year-to-date payment totals to preclude tax withholding if cumulative payments are less than $1,500.

In summary, based on the amendments to the original legislation, the University is required to withhold 4% of amounts paid for personal services performed in NC by a nonresident (i.e. out-of-state) individual or business in connection with a performance, an entertainment, an athletic event, a speech, or the creation of a film, radio, or television program. The tax withholding requirement does not apply to purchases of goods. Also, the tax withholding requirement does not affect the payments of salaries and wages made to University faculty, staff, student, and temporary employees.

Attached is a revised Information Sheet that was originally provided with the memorandum to Deans, Directors, and Department Chairs number 1814 issued December 16, 1997. 'Me revisions are in bold font, and the items that were changed are lined through.

Please share this information with the appropriate staff members in your area. I can be reached at 962-7007 if you have any questions. Thank you for your help with this matter.

Duty Day Explanation: : Withholding is required only if the compensation is paid for services performed in NC.  When the nonresident contractor provides the service entirely in NC, tax must be withheld from the total amount of compensation. If the nonresident contractor performs the contracted service in more than one state, the University must withhold NC tax only from the portion of the compensation that is attributable to this State. In determining the portion of compensation subject to withholding of NC income tax, a nonresident contractor performing contracted service in NC and in one or more other states must use a method determining NC source income that fairly and equitably apportions and allocates the compensation for services rendered in NC.

The NC Department of Revenue recommends that contractors use the "duty day" method to allocate the compensation to NC. A duty day is any day or part of a day in which an activity connected with the service is performed. The nonresident contractor's compensation which is subject to withholding is determined by allocating the total compensation to the duty days spent in NC rendering services and to the duty days spent outside of NC rendering services. For example, assume a nonresident corporation contracts for $ 10,000 to provide an architectural design for a University building being constructed entertainment event. The corporation's representative spends 42 days on campus to view the construction site and discuss potential designs to help administer the event and spends 8 days outside NC performing services related to the event drawing the designs, a-ad 1 day en campus   presenting the designs. The amount of withholding would be $80 which represents 4% of $2,000. The amount of $2,000 is subject to withholding since 2 days were spent working in NC at a fee rate of $ 1,000 per day. The vendor will need to indicate on the invoice the number of duty days in NC and outside of NC. 'Me absence of such information will necessitate withholding on the entire amount.

Affiliated Organizations Notation: Organizations affiliated with the University may have some funds on deposit with the University in order to use the University's disbursement process or for other reasons. Each affiliated organization will be responsible for ensuring appropriate withholding, remitting, and reporting of NC income tax withheld based on the new State requirements. One option available to affiliated organizations is to process payments that are subject to withholding for an amount net of the 4% withholding rate. Accounting Services will then provide assistance with compliance by establishing an FRS withholding account for the affiliated organizations NC income tax liability and processing journal entries initiated by the affiliated organization to account for the tax liability.

Contact the University Controller at 962-7007 or Dennis_Press@unc.edu if you need assistance.