July 20, 2016
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, 2012.
FACTS
The Taxpayers filed a joint Virginia resident individual income tax return for the 2012 taxable year and claimed a credit for income tax paid to the state of Arkansas. The return as originally filed resulted in an overpayment of tax, and a refund was issued. Under review, the Department denied the credit because the Taxpayers had not attached their Arkansas return. Subsequently, the Taxpayers submitted their Arkansas return. Based on that return, the Department allowed only a portion of the credit claimed, and a revised assessment was issued. The revised assessment included the amount of tax the Taxpayers underpaid as a result of the credit being partially denied, plus the amount of the prior refund and interest. The Taxpayers appealed, contending they properly computed the credit for income tax paid to Arkansas.
DETERMINATION
As a matter of fairness and equity most states, including Virginia, provide a mechanism to relieve residents from being taxed by both their state of residence and the state in which the income was derived. Virginia's method of limiting taxation of income by more than one state has been to permit a credit for taxes paid to other states pursuant to Va. Code § 58.1-332. By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
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 or gain on the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). The limitation is computed by multiplying the individual's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income.
For the taxable year at issue, Arkansas required nonresidents to compute both Arkansas taxable income and income tax as if the nonresident were in fact a resident. The tax computed as if a resident was converted to a nonresident tax by applying a fraction, the numerator of which was adjusted gross income from Arkansas sources, and the denominator of which was adjusted gross income from all sources.
The Department has previously ruled on the method in which a Virginia resident will compute a credit for income tax paid to a state which determines the tax on a nonresident in a manner similar to Arkansas. See P.D. 95-96 (5/1/1995) and P.D. 94-91 (3/29/1994), each dealing with New York income tax. See also P.D. 95-151 (6/12/1995), P.D. 95-174 (6/27/1995), and P.D. 15-58 (4/3/2015).
An analysis of the Arkansas and New York nonresident individual income tax formulas described in P.D. 95-96 and P.D. 94-91 shows these computations to be the same in all material respects. Both computations require the nonresident to compute taxable income and tax as if they were a resident. Both computations then convert a resident tax to a nonresident tax by applying a proportion that references nonresident income to total income. Therefore, the Department finds its written policy as described in the aforementioned rulings to be appropriate for a Virginia resident in computing a credit for income tax paid to Arkansas.
In P.D. 94-91, the Department required that the allocation percentage calculated on the New York nonresident return (which was used to convert the resident tax to the nonresident tax) must be applied to the New York taxable income calculated as a resident in order to determine the New York nonresident taxable income. The result was used in the numerator of the fraction to compute the limitation imposed by Va. Code § 58.1-322 A.
In this case, the Department applied the allocation percentage calculated on the Arkansas nonresident return to the amount of net taxable income computed as a resident. The Department used the result to compute the limitation imposed by Va. Code § 58.1-332 A. As such, the Department's adjustment properly limited the credit to the amount of Virginia income tax imposed on the amount of Arkansas income actually subject to tax for the 2012 taxable year.
Accordingly, the assessment is upheld. The Taxpayers will receive an updated bill shortly, which will include accrued interest to date. The Taxpayers should remit the balance due 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/1-6328998271.M