Under South Carolina's 1989 backup-withholding guidance, when did a payor have to withhold from reportable interest, dividends, and other reportable payments?

Plain-English summary

South Carolina Revenue Ruling 89-20 imposed historical 4% backup income-tax withholding on reportable payments under conditions modeled on Internal Revenue Code section 3406.

A payor had to withhold when:

• the payee failed to furnish a taxpayer identification number in the required manner;
• the Tax Commission notified the payor that the number furnished was incorrect;
• the Tax Commission notified the payor to start withholding because of notified payee underreporting; or
• the payee failed to certify, when required, that the payee was not subject to backup withholding or that the identification number was correct.

The ruling applied to reportable interest and dividends and to other reportable payments, including certain royalties, nonemployee compensation, and broker and barter-exchange transactions. It stated that the underreporting and certification conditions applied only to reportable interest and dividend payments.

Relationship to federal backup withholding

The ruling used IRC section 3406 and its regulations to define reportable payments and the responsibilities of payors and payees, but it did not treat every federal notice as a South Carolina order.

Only the Tax Commission—or a broker notified by the Commission—could provide the notices described for an incorrect taxpayer identification number or notified underreporting. A payor could not begin South Carolina withholding for those conditions solely because the Internal Revenue Service sent a federal notice.

For notified underreporting, the Commission said it would rely on the IRS to notify the payee and would not begin South Carolina withholding unless the IRS had already begun withholding.

When withholding began or ended

For failure to provide a taxpayer identification number or a required certification, the payor generally began withholding regardless of the payee's residence. A payor with offices in other states did not have to withhold under those two conditions for accounts established and serviced from offices outside South Carolina.

The ruling allowed the federal 60-day grace period for a payee waiting to receive a taxpayer identification number. Withdrawals could occur during that period without withholding unless the payee closed the account.

The payor had to notify the payee that South Carolina withholding was beginning in the same manner as federal notice, with appropriate language changes.

If the Tax Commission or IRS notified the payor to stop withholding, the payor had to stop South Carolina withholding. The payor did not have to notify the Commission when withholding ended because of an IRS termination notice, a new taxpayer identification number, or another authorized reason.

A payee who believed withholding was wrongly ordered or no longer justified could request a termination order from the Commission at the address stated in the ruling. The ruling said no separate request was needed when the IRS terminated withholding.

Effective-date rule for older accounts

For South Carolina purposes, the ruling treated January 1, 1984 and other pre-July 1, 1989 dates in IRC section 3406 and its regulations as July 1, 1989.

It therefore said the certification-failure condition applied only to accounts opened after July 1, 1989. An older account could still be subject to withholding when the taxpayer had never furnished an identification number.

Historical returns and information reporting

Withholding agents had to file a return and remit withheld funds on the last day of the month after each calendar quarter. The ruling directed payment through the same channel used for normal wage withholding and said Forms 1605 and 1606 were being revised for the new law.

Payors had to show South Carolina withholding on Form 1099 or a substitute sent to the payee. The ruling described where to place the amount when the form lacked a state-withholding box.

It also described combined federal/state magnetic-media filing. A participating payor that had filed consent did not have to send Form 1099 copies to the Commission; a nonparticipant had to file information returns under the cited South Carolina provision. For 1989, those returns did not have to include South Carolina backup-withholding information.

The payee had to submit a Form 1099 or substitute with the South Carolina income-tax return to claim credit for the withholding.

Historical liability and penalties

The ruling made the payor liable for the amount that should have been withheld. It also listed historical failure-to-file, failure-to-pay, negligence, and interest-related penalties and said applicable penalties could be combined.

It stated that the federal $50 penalty described in IRC section 6676 for a missing or incorrect taxpayer identification number did not apply to South Carolina withholding.

What this means for you

Payors and withholding agents

Under this historical ruling, South Carolina backup withholding required attention to the specific trigger, the source of any notice, the account's servicing office, and the account-opening date. Federal and state withholding did not begin in every circumstance at the same time.

Payees

A payee could prevent or end withholding by supplying the required identification number or certification when authorized, and could seek a Commission termination order when the withholding was incorrect or its basis no longer existed.

Accountants and tax professionals

RR 89-20 describes a 1989 system. Its 4% rate, incorporated federal dates, forms, reporting arrangements, deadlines, addresses, and penalty amounts should not be used for current payments without checking current law and Department instructions.

Common questions

Q: What was the South Carolina backup-withholding rate under RR 89-20?

A: Four percent of the covered reportable payment.

Q: What kinds of payments were reportable?

A: The ruling covered reportable interest and dividends and other reportable payments, including certain royalties, nonemployee compensation, and broker and barter-exchange transactions.

Q: Did an IRS notice automatically start South Carolina withholding for an incorrect number or underreporting?

A: No. For those conditions, the ruling required notice from the Tax Commission or a broker that had been notified by the Commission.

Q: Did backup withholding depend on the payee's residence?

A: For identification-number and certification failures, the ruling generally required withholding regardless of residence. But a multi-state payor did not have to withhold under those conditions for accounts established and serviced outside South Carolina.

Q: Was there time to obtain a taxpayer identification number?

A: Yes. The ruling allowed the cited federal 60-day grace period for a payee waiting to receive a number, unless the payee closed the account.

Q: When were the withheld funds remitted?

A: Under the historical procedure, on the last day of the month after each calendar quarter in which funds were withheld.

Q: Can the 1989 rate and procedures be used now?

A: Not without checking current law and Department guidance. RR 89-20 states historical rules, forms, deadlines, and penalties.

Citations and references

• S.C. Code section 12-9-30, as amended July 1, 1989 — historical backup-withholding provision
• Internal Revenue Code section 3406 — federal backup-withholding framework incorporated by reference
• Temporary Treasury regulation 35a.9999-2, question 18 — 60-day taxpayer-identification-number grace period cited
• S.C. Code section 12-7-1590 — historical information-return filing provision cited
• S.C. Code section 12-3-140 and SC Revenue Procedure 87-3 — authority cited for the Revenue Ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR89-20.pdf

Original ruling text

SC REVENUE RULING #89-20

SUBJECT:

Backup Income Tax Withholding

EFFECTIVE DATE:

July 1, 1989

SUPERSEDES:

S.C. Information Letter #89-19 and any oral directives in conflict
herewith.

REFERENCE:

S.C. Code Ann. Section 12-9-30 (As Amended July 1, 1989)

AUTHORITY:

S.C. Code Ann. Section 12-3-140 (Law. Coop. 1976)
S.C. Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how
tax law is to be applied to a specific set of facts. A Revenue Ruling is
public information and remains a permanent document until
superseded by a Regulation or is rescinded by a subsequent Revenue
Ruling.

PURPOSE:

This ruling is being issued to provide guidance on the application of
Section 12-9-30 of the S.C. Code as added by the 1989 Appropriations
Bill.

South Carolina backup income tax withholding is imposed on reportable payments in the same
manner as provided by Internal Revenue Code Section 3406, except that the amount to be
withheld is four (4) percent of the payment. S.C. Code Section 12-9-30, which requires backup
income tax withholding is effective July 1, 1989.
Payors are required to deduct and withhold from payments of reportable interest and dividends,
and other reportable payments a tax equal to four (4) percent of the payment if:
(A)

the payee fails to furnish his taxpayer identification number to the payor in the
manner required,

(B)

the Tax Commission notifies the payor that the taxpayer identification number
furnished by the payee is incorrect,

(C)

the Tax Commission notifies the payor that backup withholding should be started
due to notified payee under-reporting, or
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(D)

the payee fails to certify to the payor, when required, that (1) the payee is not
subject to backup withholding or (2) the taxpayer identification number provided
to the payor is correct.

Other reportable payments for purposes of backup withholding include certain payments of
royalties, non-employee compensation and transactions by brokers and barter exchanges. The
definition of "reportable interest or dividend payment", "other reportable payment" and other
terms used in this Revenue Ruling are contained in section 3406 of the Internal Revenue Code.
This provision is based upon section 3406 of the Internal Revenue Code. Section 3406 and its
regulations (including temporary regulations) should be consulted to determine the
responsibilities of payors and payees. The following interpretations are provided to assist in
applying section 3406 to South Carolina withholding on reportable payments:
1.

Items (C) and (D) above only apply to reportable interest and dividend payments.

2.

Only the Tax Commission or a broker who has been notified by the Tax Commission
can issue the notification for items (B) or (C) above. The payor cannot begin South
Carolina backup withholding if the payor is notified by the Internal Revenue Service to
begin withholding under item (B) or (C). If a payor is notified to begin withholding by
a broker, the payor shall not begin withholding unless the broker's notification makes it
clear that:
a. Withholding is required by item (A) above;
b. Withholding has been ordered by the Tax Commission pursuant to item (B) or
(C) above; or
c. Withholding is required by item (D) and the determination that withholding is
required has been made by substituting July 1, 1989 (the effective date of the
South Carolina Act) for any prior date in section 3406 and its regulations.
When a broker is required to notify a payor to begin South Carolina backup
withholding, the notice must specifically indicate the condition above which has been
met.
The Tax Commission intends to review lists prepared by the Internal Revenue Service
to determine which payees should come within items (B) or (C) for South Carolina
withholding purposes.
For purposes of item (C), the Tax Commission will not notify the payee. The Tax
Commission will rely on the Internal Revenue Service to notify the payee and will not
begin item (C) withholding unless the Internal Revenue Service has begun withholding.

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3.

If the conditions of item (A) or (D) are met, the payor should begin withholding
regardless of the residence of the payee. If, however, a payor has offices in states other
than South Carolina, the payor is not required to withhold under item (A) or (D) for
accounts established and serviced from offices outside South Carolina.

4.

In determining whether the conditions of item (A) are met, the payor will allow the
payee the 60 day grace period provided by question 18 of temporary Treasury
regulation 35a.9999-2 for payees who are waiting to receive their taxpayer
identification numbers. Payors can allow withdrawals during this 60 day period without
imposing withholding, unless the payee closes the account.

5.

The payor must notify the payee that it is instituting South Carolina withholding in the
same manner as it is required to notify payees about federal withholding, making the
appropriate changes in the language.

6.

If the Tax Commission or Internal Revenue Service notifies the payor to stop
withholding, the payor must stop South Carolina withholding.

7.

The payor is not required to notify the Tax Commission if it stops South Carolina
withholding because it receives a termination notice from the Internal Revenue Service,
the payee furnishes a new taxpayer identification number, or any other authorized
reason.

8.

If a payee believes that South Carolina withholding has been in- correctly ordered, or
the reason for it no longer exists, the payee can request an order terminating South
Carolina withholding. Requests for termination with an explanation of the reasons for it
should be sent to:
PRO - Backup Withholding
P.O. Box 11189
Columbia, South Carolina 29211-1189
There is no reason to make this request if the Internal Revenue Service terminates
withholding. See item 6 above.

9.

Effective date - The date January 1, 1984, and all other dates prior to July 1, 1989, in
section 3406 of the Internal Revenue Code and its regulations, will be deemed to be
July 1, 1989, for South Carolina withholding purposes. Therefore, for example, payee
certification failure ((D) above) only applies to accounts opened after July 1, 1989.
Accounts opened prior to July 1, 1989, are, on or however, subject to withholding under
(A) above if the taxpayer never furnished his taxpayer identification number.

10.

Returns - Withholding agents are required to make a return and remit withheld funds on
the last day of the month following each calendar quarter for which funds are withheld.
Funds are to be paid in the same manner and to the same institution as normal wage

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withholding. Form 1605, Employers Withholding Tax Return - Quarterly, and Form
1606, Employers Annual Reconciliation of Income Tax Withheld are being revised to
accommodate the new law.
11.

Information Returns (1099s) - Payors should include the amount of South Carolina
withholding on Form 1099s or substitute Form 1099s sent to payees. If the payor uses
Form 1099 and it has a block for state withholding, the amount must be included in that
block. The Tax Commission is working with the Internal Revenue Service to provide
that block on Form 1099s. If the payor uses Form 1099 and there is no such block, the
" immediately under the title of the 1099.
payor should place "SC Withholding $
For example, under the words (Interest Income) for the interest 1099. See the attached
example.
The South Carolina Tax Commission has entered into an agreement with the Internal
Revenue Service to allow combined reporting of information returns on magnetic
media. The requirements and procedures are outlined in Internal Revenue Procedure
83-48 under the title of "Combined Federal/State Filing".
If the payor has filed its consent to participate and participates in the Combined
Federal/State Filing with the Internal Revenue Service, it is not required to send copies
of Form 1099 to the Tax Commission. If the payor has not consented to Combined
Federal/State Filing, it must file its information returns with the Tax Commission in
accordance with section 12-7-1590 of the South Carolina Code. For 1989, these returns
do not have to include South Carolina back-up withholding information.
The payee will be required to submit a copy of the Form 1099 (or substitute 1099) with
his or her income tax return to obtain credit for the payments.

12.

Penalties - The payor is liable for the amount which should have been withheld. In
addition penalties for failure to withhold include those contained in section 12-5440(b)(1) and (2). In the case of failure to file a return, the penalty is five percent of the
amount which should have been withheld with an additional five percent for each
additional month, not to exceed twenty-five percent. If the return is not filed within 60
days of the due date the addition for failure to file will not be less than the lesser of
$100 or 100% of the amount required to be shown on the return. In the case of failure
to pay, the penalty is one-half of one percent with an additional one-half of one percent
for each month, not to exceed twenty-five percent. If any part of an underpayment is
due to negligence or disregard of regulations, a penalty of five percent of the
underpayment and fifty percent of the interest payable under section 12-54-20 will be
assessed. Withholding agents should be aware that these penalties may be combined if
applicable.
The $50 penalty in section 6676 of the Internal Revenue Code on payors failing to
include a taxpayer identification number on a return or including an incorrect number
does not apply to South Carolina withholding.

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SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
, 1989
August 23

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