Tax Type
Withholding Taxes
Description
Taxpayer not required to pay withholding tax
Topic
Pass-Through Entities
Persons Subject to Tax
Tangible Personal Property
Taxability of Persons and Transactions
Withholding of Tax
Date Issued
12-06-2012
December 6, 2012
Re: § 58.1-1821 Application: Withholding Tax
Dear *****:
This will reply to your letter in which you seek a refund of penalty and interest paid by ***** (the "Taxpayer") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer was a Virginia limited partnership that was owned by several Virginia residents and one domiciliary resident of ***** (State A). The Taxpayer generated income from its ownership interest in savings accounts, certificates of deposit, stocks, bonds and royalty income. The Taxpayer filed its nonresident withholding tax return and remitted withholding tax on behalf of a nonresident member after the due date. The Department issued an assessment for penalty and interest to the Taxpayer for failing to timely withhold income tax for income attributed to the nonresident member.
The Taxpayer paid the assessment and filed an appeal, contending it did not have taxable income subject to the withholding requirement. It also asserts that the pass-through entity withholding requirement violates the Due Process Clause and Commerce Clause of the United States Constitution.
DETERMINATION
Virginia Code § 58.1-486.2 A provides that "a pass-through entity that has taxable income for the taxable year derived from or connected with Virginia sources, any portion of which is allocable to a nonresident owner" must pay withholding tax. The amount of tax that must be withheld is equal to 5% of the nonresident owner's share of income from Virginia sources of all nonresident owners that may be lawfully taxed by Virginia and which is allocable to a nonresident owner. See Va. Code § 58.1-486.2 B 1.
Virginia pass-through entities that are established solely to invest in intangible personal property, such as stocks and bonds, and that have no employees, and no real or tangible property are not considered to be carrying on a trade or business. See Public Document (P.D.) 94-275 (9/16/1994) and Tax Bulletin (VTB) 05-6 (5/6/2005). Thus, income from the intangible property held by an investment pass-through entity is not income from Virginia sources. As such, pass-through entities that are established solely to invest in intangible personal property and that have no employees and no real or tangible property are not required to withhold Virginia income tax.
The Taxpayer generated income from its ownership interest in savings accounts, certificates of deposit, stocks, bonds and royalty income. The evidence does not indicate that the Taxpayer had any employees, real estate, or tangible property in Virginia. As such, the Taxpayer was not considered to be carrying on a trade or business in Virginia and did not have income from Virginia sources. Therefore, the Taxpayer was not required to pay withholding tax to the Department pursuant to Va. Code § 58.1-486.2 A. Accordingly, a refund of the tax, penalty and interest paid by the Taxpayer for the taxable year ended December 31, 2008, plus any accrued interest, will be issued.
The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4549541656.B
Rulings of the Tax Commissioner