June 8, 2018
Re: § 58.1-1821 Application: Withholding Tax
Dear *****:
This will respond to your letter submitted on behalf of your client, ***** (the “Taxpayer”), in which you seek correction of the pass-through entity withholding tax assessment issued for the taxable periods of January 2015 through December 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a pass-through entity that is owned by ***** (the “LLC”), the ***** (the “Trust”) and the (the “Estate”). The Taxpayer filed an original pass-through entity return of income and a return of nonresident withholding tax on which it reported a withholding tax liability that was not paid. As a result, the Department issued an assessment of pass-through entity withholding tax. The Taxpayer contends that it erroneously reported a pass-through withholding tax liability on its 2015 return because its owners would be liable for any pass-through withholding tax liability.
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 lawfully be taxed by Virginia and which is allocable to a nonresident owner. See Virginia Code § 58.1-486.2 B 1.
Under Virginia Code § 58.1-486.1, a “nonresident owner” is any person treated as a partner, member, or shareholder of the pass-through entity for federal income tax purposes and, in the case of an individual, is not a domiciliary or actual resident of Virginia. Pursuant to Virginia Code § 58.1-390.2, owners of pass-through entities are liable for tax “only in their separate or individual capacities on income passed through to the owners of pass-through entities”. As such, owners are subject to tax on their distributive share of items of income, gain, loss, deduction, or credit of the pass-through entity. Therefore, when nonresidents are owners of pass-through entities, the pass-through entity must compute, report and remit withholding tax. See Virginia Code § 58.1-486.1 A and the Guidelines for Pass-Through Entity Withholding, issued as Public Document (P.D.) 07-150 (9/21/2007).
Pass-through entities that have taxable income from Virginia sources and that must allocate any portion of that income to at least one nonresident owner during any portion of the taxable year must pay the withholding tax unless an exemption applies. See P.D. 07-150. Generally, pass-through entities must remit the required withholding tax with the Pass-Through Entity Return of Income and Return of Nonresident Withholding (Form 502). In such cases, the pass-through entity withholding must be remitted by the 15th day of the fourth month following the close of the taxable year on the Pass-Through Entity Withholding Tax Payment form (Form 502W).
In accordance with P.D. 07-150, when a pass-through entity owns another pass-through entity, the lower-tier entity should not withhold tax on the Virginia income allocable to the upper-tier entity. In this case, the Taxpayer, which is a lower tier entity, withheld tax rather than the upper-tier LLC, Trust, and Estate. As such, the LLC, Trust and Estate were liable for the Virginia withholding tax due.
The LLC, Trust, and Estate are all pass-through entities in accordance with Virginia Code § 58.1-390.1. The Taxpayer contends that no withholding tax is due because the LLC received a hardship waiver from the withholding requirement and both Trust and the Estate reported losses. Pursuant to Virginia Code § 58.1-486.2 C 3, an entity may apply to the Department for a hardship waiver.
The LLC is unable to provide proof that a hardship waiver was granted and the Department has found no evidence that a waiver was ever issued. As such, it was liable for withholding tax and should have filed a Form 502. In addition, even if a pass-through entity has no withholding tax liability because it has no Virginia source income, it is still required to file a Form 502. See P.D. 07-150. As such, the Trust and the Estate should have filed the appropriate form even though they reported losses.
Accordingly, the appropriate form must be filed by the LLC, the Estate and the Trust for the taxable period of January 2015 through December 2015. The Taxpayer must submit an amended Form 502 for the same period. The returns, along with any withholding tax due, should be sent 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: *****. If the returns are not received within the allotted time, the assessment will be considered to be correct and collection actions may result.
The Code of Virginia sections and public document 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/1143.B