Tax Type
Individual Income Tax
Description
New York Metropolitan Commuter Transportation Mobility Tax is not an income tax substantially similar to Virginia's individual income tax.
Topic
Out of State Tax Credits
Date Issued
10-18-2013
October 18, 2013
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the Virginia individual income tax assessments issued to ***** (the "Taxpayers") for the taxable years ended December 31, 2009 through 2011.
FACTS
The Taxpayers, Virginia residents, claimed credits for payment of the New York Metropolitan Commuter Transportation Mobility Tax (the "NY MCTMT") on their 2009, 2010, and 2011 Virginia income tax returns. Under review, the Department disallowed the credits and issued assessments. The Taxpayers filed an appeal, contending that they are entitled to claim the credits because the NY MCTMT is an income tax paid to another state and that denial of the credits would result in double taxation.
DETERMINATION
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. In 2012, the General Assembly enacted Senate Bill 681 (Chapter 292, 2012 Acts of Assembly), effective for taxable years beginning on or after January 1, 2007, to clarify and restore the Department's long-standing policy of allowing a credit only for income taxes that are similar to Virginia's individual income tax. See P.D. 12-108 (7/1/2012). Virginia Code § 58.1-332.2 B clarifies the circumstances in which a franchise, license, business, or occupational tax will not qualify as an income tax. The Taxpayers contend they should be allowed to claim a credit for the NY MCTMT because it is not categorized as a type of tax specifically subject to disqualification under Va. Code § 58.1-332 A or § 58.1-332.2 B.
A tax does not necessarily need to be a franchise, license, excise, business, or occupation tax to be disqualified for purposes of the out-of-state credit. Virginia Code § 58.1-332.2 C provides that "[t]he credits in §§ 58.1-332 and 58.1-332.1 shall apply only when the tax imposed in the other state or foreign country is substantially similar to the tax imposed by Article 2 (§ 58.1-320 et seq.), as defined by this section." (Emphasis added). Thus, a tax, regardless of type, must still be substantially similar to the Virginia individual income tax imposed under Va. Code § 58.1-320 et seq., which applies generally to all of the income of Virginia residents and all of the income of nonresidents sourced to Virginia.
The NY MCTMT is a state-administered tax imposed on employers and self-employed individuals who engage in business within the metropolitan commuter transportation district (the "MCTD"), which comprises certain counties in the New York City metropolitan area. The tax is administered by the State of New York for the benefit of the Metropolitan Transportation Authority, which receives the proceeds of the tax to preserve, operate, and improve transportation in that district. In this case, the husband became subject to the NY MCTMT during the taxable years in question because he had earnings attributable to the MCTD and was considered a self-employed individual.
The NY MCTMT is unlike the Virginia individual income tax in a number of ways. For employers, it is actually not based on income at all. It is based on their payroll expenses for "covered employees" under the rules and regulations of the agency administering the tax. Even for a self-employed individual, the NY MCTMT only applies to net earnings from self-employment that are attributable to the MCTD, rather than to all types of income. Thus, it structurally resembles federal payroll and self-employment taxes, rather than the income tax set forth in the Internal Revenue Code (IRC) upon which Virginia's individual income tax is based. See Va. Code § 58.1-322 and IRC § 62. It has been the Department's long-standing policy that taxes that use only certain types of income as their measure are not the broad-based net income taxes for which Virginia will allow a credit. See P.D. 89-348 (12/20/1989).
The NY MCTMT also differs from the Virginia individual income tax in that it expressly allocates the proceeds of the tax to the Metropolitan Transportation Authority to benefit transportation services exclusively in the MCTD. In contrast, the Virginia individual income tax is not earmarked by law for a particular entity or local purpose. Furthermore, employers and self-employed individuals are only subject to the tax if they engage in business in the MCTD, which comprises only part of the state. In Virginia, an individual's liability for state income tax does not depend, even in part, on nexus with any particular Virginia locality.
Based on this analysis, the NY MCTMT is not substantially similar to the Virginia individual income tax and does not qualify as an out-of-state income tax for purposes of Va. Code § 58.1-332. The risk of double taxation does not change the result. Courts have long recognized that the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event. It is also a long established principle that the risk of double taxation does not violate a taxpayer's constitutional rights. In Guaranty Trust Co. of New York v. Commonwealth of Virginia, 305 U.S. 19 (1938), the United States Supreme Court held that the imposition of an income tax under Virginia laws on income received as beneficiary of a trust established in New York did not violate the Due Process Clause of the Constitution, notwithstanding that the trust was also subject to tax in New York. Nor did such treatment deny equal protection under the United States Constitution.
Accordingly, the NY MCTMT is not an income tax substantially similar to Virginia's individual income tax. Thus, it is not an out-of-state income tax that qualifies for the credit under Va. Code § 58.1-332, and the Department's adjustments are correct. The assessments remain due and payable. An updated bill will be issued shortly to the Taxpayers. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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 *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
Craig M. Burns
Tax Commissioner
AR/1-5371157153.M
Rulings of the Tax Commissioner