Credit: Tax Paid to Another State - Eligibility
March 12, 2024
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2018.
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 2018 taxable year. 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. Based on the information received, the Department determined that the Taxpayer was a domiciliary resident of Virginia but was entitled to a credit for tax paid to ***** (State A) and issued an assessment accordingly. The Taxpayer appeals, contending he was not a resident of Virginia in 2018 and had no Virginia source income.
DETERMINATION
Taxation of Virginia Residents
Virginia Code § 58.1-301 provides, with certain exceptions, that the terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia.
It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves, 300 U.S. 308, 312-313, 57 S. Ct. 466, 467 (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.” As such, even if the Taxpayer had no Virginia source income, he would have been subject to Virginia income tax if he had been a Virginia resident.
Residency
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of that person and the place to which that person intends to return even though they may be residing elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon their 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 their 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 their 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, there 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 proving that the domicile has been changed lies with the person alleging the change.
In determining domicile, consideration may be given to the person’s expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession 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. The taxpayer has the burden of proving that their Virginia domicile has been abandoned. If the information is inadequate to meet this burden, the Department must conclude that the taxpayer intended to remain indefinitely in Virginia.
The Taxpayer explains that he lived and worked in Virginia until December 2017 when he moved to ***** (State B) after accepting a position with a State B employer. He leased a residence in State B through February 2018. He explains that he returned briefly to Virginia in March 2018 and then moved to State A after receiving an employment offer there. He states that he has lived and worked in State A ever since. During this time, he leased two residences, and he later purchased a residence in State A in 2020. He has filed State A resident returns since 2018.
The Taxpayer also retained connections to Virginia. His spouse and children remained in Virginia, and he visited them regularly. He maintained a Virginia driver’s license which was reissued in August 2018 and renewed in January 2022. He owned two vehicles which were registered in Virginia. He has held a Virginia voter’s registration since 2007 and voted in Virginia in 2020. In addition, the Taxpayer continued to co-own a Virginia residence with his spouse where he would stay during his visits to Virginia. Further, during the pandemic, the Taxpayer states that he primarily teleworked from their Virginia residence although he continued to file income tax returns with State A.
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 Commissioner of 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 they retain 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 fact that an individual has a Virginia driver’s license is one factor to consider, among other possible factors, in any given domicile case. Nonresidents are not permitted to hold Virginia driver’s licenses. See Virginia Code § 46.2-323.1. They are, however, permitted to continue to use their licenses from their home states or countries. See Virginia Code § 46.2-307. For the purposes of Title 46.2 of the Code of Virginia, “nonresident” is generally defined as every person who is not domiciled in the Commonwealth. See Virginia Code § 46.2-100. Thus, in general, an individual must be a domiciliary resident of Virginia in order to hold a Virginia driver’s license.
Individuals who have resided in Virginia more than six months, however, are deemed to be residents for purposes of applying most of the provisions of Title 46.2 of the Code of Virginia, including the driver’s licensing provisions of Title 46.2, Chapter 3 (Virginia Code § 46.2-300 et seq.). In addition, because an individual who has been physically present and residing in Virginia for more than six months may nevertheless remain a domiciliary resident of another state or country, it may be necessary in such cases to examine additional factors to determine whether a person who has obtained a driver’s license based on physical presence and actual residency in Virginia also intended to become a domiciliary resident of Virginia. However, once it is clear that an individual has established domiciliary residency in Virginia, subsequent renewals of a Virginia driver’s license even while absent from the state will be considered very strong evidence of the individual’s intent to remain a domiciliary resident of Virginia. That is because the basis of the individual’s claim to be entitled to a Virginia driver’s license would no longer be based on the length of time the individual was physically present in Virginia as an actual resident, but rather on the implication that the individual intended to remain a domiciliary resident of Virginia.
With regard to eligibility to vote, Article II, Section 1 of the Constitution of Virginia states in relevant part as follows:
In elections by the people, the qualifications of voters shall be as follows: Each voter shall be a citizen of the United States, shall be eighteen years of age, shall fulfill the residency requirements set forth in this section, and shall be registered to vote pursuant to this article.
The residence requirements shall be that each voter shall be a resident of the Commonwealth and of the precinct where he votes. Residence, for all purposes of qualification to vote, requires both domicile and place of abode.
The domicile and place of abode requirement found in the Constitution of Virginia is also reflected in the definition of “residence” or “resident” used in Virginia election statutes. See Virginia Code § 24.2-101. Consistent with the precedent established by the Virginia Supreme Court in Coopers Adm’r v. Commonwealth, 121 Va. 338, 93 S.E. 680 (1917), the Department will consider the fact that an individual obtains a Virginia voter’s registration and actively votes as a Virginia resident in elections in Virginia to be conclusive evidence that that individual considered Virginia to be their domicile during the time they held and used such registrations.
The Taxpayer explains that he maintained his Virginia driver’s license because he did not drive in State A and that the vehicles registered in Virginia were driven by his spouse and child. The Taxpayer also explains that he renewed his Virginia license in 2022 because he happened to be here visiting when he lost his license. Similarly, he explains that he voted in Virginia because he happened to be here at the time.
Virginia Code § 58.1-205 provides that, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayer to show he was not subject to income tax in Virginia.
As stated above, a change of domicile requires that an individual prove two elements concurrently: 1) that the individual abandoned the old domicile and had no intent to return to it; and 2) that the individual established a new domicile, which must have been formed by physical presence coupled with the intent to remain permanently or indefinitely. The Department expects that when individuals are seeking a permanent change of domicile, they will normally register vehicles, obtain a new driver’s license, register to vote, and perform other official acts indicating their intent to change domicile. To the extent such connections may be retained with Virginia, it suggests that the individual may not have been certain that they intended to abandon their Virginia domicile. If a permanent change of residence were intended, there would be no need to retain such connections with a former state.
Credit for Taxes Paid to Another State
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 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. As an actual resident of State A and a domiciliary resident of Virginia, the Taxpayer would be allowed a credit against his Virginia income tax liability for income tax paid to State A to the extent permitted by Virginia Code § 58.1-332.
CONCLUSION
In this case, the Taxpayer’s ongoing connections with Virginia raise significant doubts as to his intent to abandon his Virginia domicile. In particular, using a Virginia voter’s registration to vote and having his Virginia driver’s license reissued and renewed during the period when he was not actually residing in Virginia is significant evidence of domiciliary intent. The Department has stated that a change of domicile occurs as part of a process in which no single factor is dispositive. As such, facts as they existed both before and after the exact taxable year at issue may be instructive as to a taxpayer’s intent over a broader period of time that includes such year.
After carefully reviewing all of the evidence provided, I find that that the Taxpayer has failed to prove that he abandoned his Virginia domicile as of the 2018 taxable year. Therefore, he remained subject to income tax as a domiciliary resident of Virginia. The Taxpayer will, however, be able to claim a credit for the income tax he paid to State A.
The assessment at issue was made based on the best information available to the Department pursuant to Virginia Code § 58.1-111. The Taxpayer, however, may have information that better represents his Virginia income tax liability for the taxable year at issue. Therefore, he should file a 2018 Virginia resident income tax return and claim credit for income tax paid to State A to the extent permitted by Virginia Code § 58.1-332. The return 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 *****, Richmond, Virginia 23261, Attention: *****. The return will be reviewed and processed, and the assessment will be adjusted as warranted. If the return is not received within the allotted time, the assessment will be adjusted based on the available information.
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 (804) *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4525.X