May 29, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2013.
FACTS
The Taxpayers, a husband and wife, moved to Virginia in March 2013. They filed a 2013 Virginia part-year income tax return claiming a credit for tax paid to New Hampshire. Under review, the Department denied the credit and issued an assessment for tax due. The Taxpayers filed an appeal, contending the credit should have been allowed because they paid tax to New Hampshire on the same income that was subject to tax in Virginia.
DETERMINATION
Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income. However, Va. Code § 58.1-332 A disallows that credit to be claimed for "franchise tax, license tax, excise tax, unincorporated business tax, or any tax characterized as such by the taxing jurisdiction, although applied to earned or business income."
Out-of-State Credit - Part-Year Residents
Virginia Code § 58.1-303 provides that a person who becomes a resident of Virginia is subject to taxation during the period in which he or she is a Virginia resident and is taxed as a resident only for the portion of the year that he or she resides in Virginia.
In addition, Va. Code 58.1-303 prohibits an individual that files as a part-year resident from claiming the out-of-state tax credit under Va. Code § 58.1-332 on income tax payable to Virginia for any part of the taxable year during which they were a domiciliary or actual resident of another state. This is because Virginia part-year residents are taxed only on the income earned while residing in Virginia. However, the prohibition is limited to income earned from a state in which a taxpayer was a domiciliary or actual resident while they were also a part-year resident of Virginia.
It is not clear whether the Taxpayers were residents of New Hampshire during the same portion of the 2013 taxable year in which they were part-year residents of Virginia. If the Taxpayers were considered to be domiciliary or actual residents of New Hampshire, they would not qualify for the out-of-state credit.
Out-of-State Credit - Income Tax
Virginia Code § 58.1-332.2 C provides that "[t]he credits in §§ 58.1-332 and 58.1332.1 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 Taxpayers claimed the credit against the New Hampshire Business Enterprise Tax (NHBET). The NHBET is imposed on the taxable enterprise value base of every profit or nonprofit corporation, partnership, limited liability company, proprietorship, association or trust, with the exception of those exempt under IRC §501(c)(3) that do not engage in any unrelated activity, conducting business activities in the state. See N.H. Rev. Stat. Ann. § 77-E:2. The NHBET is assessed on the enterprise value tax base, which is the sum of all compensation paid or accrued, interest paid or accrued, and dividends paid, before special adjustments and apportionment. See N.H. Rev. Stat. Ann. § 77-E:1. Because the NHBET is based on expenditures made by a business enterprise, it is not an income tax substantially similar to Virginia's individual income tax.
CONCLUSION
Based on the evidence provided, the NHBET is not an out-of-state income tax that qualifies for the credit under Va. Code § 58.1-332. Accordingly, the Department correctly denied the Taxpayers' out-of-state credit claimed on their 2013 return and the assessment remains 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 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/1-5988676123.B