April 6, 2017
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 assessments issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2011 though 2013.
FACTS
The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia income tax return for the 2011 through 2013 taxable years. A review of the Department's records showed that the Taxpayer had not filed a return. The Department requested additional information from the Taxpayer in order to determine if his income was taxable in Virginia. When a response was not received, the Department issued an assessment. The Taxpayer appeals, contending that he resided in Maryland during the taxable years at issue. In addition, he asserts that any Virginia income tax due would be offset by income tax paid to other states.
DETERMINATION
Residency
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Va. Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means a person who, for an aggregate, of more than 183 days of the taxable year, maintained his place of abode within Virginia. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.
In order to change from one legal domicile to another legal domicile, the must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of providing that the domicile has been changed lies with the person alleging the change.
In determining domicile, consideration may be given to the individual's expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, professional or employment, income sources, residence of spouse, marital status, situs of real or tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person's domicile. A person's true intention must be determined with reference to all the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.
The Department determines a taxpayer's intent through the information provided. A taxpayer has the burden of proving that he or she abandoned his or her Virginia domicile. If the information is inadequate to meet this burden, the Tax Commissioner must conclude that he or she intended to remain indefinitely in Virginia.
The Taxpayer performed several activities to establish connections in Maryland. In May 2011, the Taxpayer accepted employment in Maryland and began leasing a place of abode. He lived in several different leased residences in Maryland during the taxable years at issue.
The Taxpayer also retained connections to Virginia. He owned vehicles that were registered in Virginia at his parents' residence. In addition, he retained a Virginia driver's license. Virginia Code § 46.2-323.1 states, “No driver's license . . . shall be issued to any person who is not a Virginia resident.” In fact, this section states that every person applying for a driver's license must execute and furnish to the Department of Motor Vehicles (DMV) a statement that certifies that the applicant is a Virginia resident. The Department has found that an individual may successfully establish a domicile outside Virginia even if he retains a Virginia driver's license. See Public Document (P.D.) 00-151 (8/18/2000). However, obtaining or renewing a Virginia driver's license is considered to be a strong indicator of intent to retain domiciliary residency in Virginia. See P.D. 02-149 (12/9/2002). The Taxpayer concedes he retained his Virginia driver's license due to the uncertain nature of his work.
In addition, the Taxpayer filed nonresident Maryland individual income tax returns for the 2011 through 2013 taxable years that reported that Virginia was his state of residence. He allocated 80% of his income to Maryland, but allocated none of the remaining 20% to Virginia. Pursuant to MD. Code Ann., [Tax-Gen.] § 10-101(k)(1)(i)(2), a resident is an individual who “for more than 6 months of the taxable year, maintained a place of abode in [Maryland], whether domiciled in [Maryland] or not.” [Inserts added.] While the Taxpayer may have leased residences in Maryland for some of the taxable years at issue, it is unclear whether he maintained a place of abode in Maryland for more than 6 months during any of the taxable years at issue. Based on his Maryland tax returns, he did not consider himself to be a resident of Maryland. Although the Taxpayer may have followed his employer's recommendations for filing his income tax returns, such advice does not preclude the requirements of Virginia tax law.
Reciprocity
Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia, and Pennsylvania. Section III B 4 of the Reciprocal Income Tax Agreement between Commonwealth of Virginia and State of Maryland provides:
Nothing in this agreement shall be interpreted to exempt a resident of Virginia or Maryland who has taxable income in the state of nonresidence, other than in the form of compensation, from liability for payment of income tax or filing an income tax return with regard to such other taxable income.
Accordingly, when Maryland residents have Virginia salary or wage compensation and other Virginia taxable income (such as income from a pass-through entity), they must file a nonresident return to report and pay tax only on the other income. See also Tax Bulletin (VTB) 06-8 (12/27/2006). The reciprocal agreement does not permit Virginia to impose income tax on Maryland residents' Virginia salaries or wages simply because they have other taxable Virginia income.
In this case, the Taxpayer did not file resident income tax returns with any state during the taxable years at issue. In addition, has he has not asserted or provided any evidence that he was domiciled in a state that does not impose an income tax. He filed Maryland nonresident returns for the 2011 through 2013 taxable years.
Credit for Taxes Paid to another State
It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In People of State of New York ex rel Cohn v. Graves, 300 U.S. 30, 857 S. Ct. 466 (1937), the United States Supreme Court explained “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.” Accordingly, Virginia is well within its authority to impose its income tax on all of the income of a resident of the Commonwealth of Virginia.
Virginia Code § 58.1-332 A, however, 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 from 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 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.
Maryland and Virginia currently have a reciprocal agreement, which states that neither state will tax the other's residents for compensation earned in the nonresident state under certain conditions. If income is not subject to Maryland's tax and its statute of limitations permits, a taxpayer may be required to amend his Maryland income tax returns and request a refund of any income tax paid in error. See P.D. 12-169 (10/26/2012). It is only when this agreement does not apply that individuals are eligible for the credit. See P.D. 05-60 (4/14/2005) and P.D. 15-141 (6/30/2015).
CONCLUSION
As a Virginia domiciliary resident and a Maryland nonresident, the Taxpayer would have been exempt from Maryland income taxation on the wage income he earned there under the reciprocity agreement. Based on the evidence provided, the Taxpayer has failed to show that he established domicile in Maryland with the intent to live there permanently and indefinitely. Until intent can be established by circumstances indicating a permanent change of domicile, the Department must conclude a change has not occurred.
Further, under the reciprocal agreement between Virginia and Maryland, the Taxpayer, as a Virginia resident, would not have been subject to tax in Maryland on income attributed to his work. In addition, the Taxpayer has filed returns and paid income tax to several different states. Because the Department held the Taxpayer as a domiciliary resident of Virginia, the Taxpayer may be eligible for a tax credit for income tax paid to those other states except Maryland.
The assessment at issue was made based on the best information available to the Department pursuant to Va. Code § 58.1-111. Because the Taxpayer was required to file Virginia income tax returns, the Department was correct in making the assessments. The Taxpayer, however, may have information that better represents his Virginia income tax liability for the taxable years at issue. Therefore, he should file his 2011 through 2013 Virginia resident income tax returns to more accurately reflect his Virginia tax liability.
The returns should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****. Upon receipt, the documentation will be reviewed and assessment will be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered to be correct as issued and collection actions may result.
The Code of Virginia sections, tax bulletin and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's website. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/861.B