Rulings of the Tax Commissioner

June 5, 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, 2022. 

FACTS

The Taxpayer filed a Virginia Special Nonresident Claim for Individual Income Tax Withheld (Form 763-S) for the 2022 taxable year, requesting a refund of taxes withheld on wages paid for active-duty military service. The Taxpayer indicated that he was a domiciliary resident of ***** (State A). In response, the Department requested a copy of the Taxpayer’s 2022 State A income tax return. The Taxpayer submitted his State A return, and the Department issued a refund. 

Under review, the Department determined that the Taxpayer’s wages had not been taxed by State A because he had claimed a credit on his State A return for taxes paid to Virginia. The Department requested that the Taxpayer submit a copy of an amended State A return that evidenced that his wages were taxed by State A. When no response was received, the Department issued an assessment to recover the refund. The Taxpayer appealed, claiming he paid taxes to State A where he was stationed during 2022.

DETERMINATION

Audits and Examinations

The Department audits tax returns and business records to ensure taxpayers comply with Virginia tax statutes. Under the Virginia Taxpayer Bill of Rights, taxpayers have the right to a fair examination. If additional information is requested, taxpayers have the right to know the reason for such a request and what will happen if they do not provide the information. Taxpayers also have the right to receive clear, simple explanations of audit procedures, appeal processes, and any changes made to their tax liability.

 As explained in Public Document (P.D.) 23-107 (10/5/2023), the mere fact that a credit is claimed on another state’s return for tax paid to Virginia does not grant the Department the authority to deny an individual’s refund claim that is based on residency in another state. Instead, a fair examination must seek to determine the individual’s liability for Virginia income tax based on factual evidence of residency or income from Virginia sources. 

While claiming credit on another state’s return for income tax paid to Virginia and asking for a full refund of all Virginia income tax withheld are inconsistent and incompatible positions, evidence of such positions is not sufficient to determine whether an individual was a Virginia resident and subject to tax on their income. If an individual was not a Virginia resident and did not have income from Virginia sources, they would be entitled to a refund of withholding by filing Form 763-S regardless of whether they filed a return with another state or not. 

With regard to the other state, the individual would be responsible for reporting an accurate liability on such state’s return. By receiving a full refund of all their Virginia income tax withholding, they would not usually be considered to have paid the tax to Virginia for purposes of an out-of-state credit. If such a credit were claimed, it would be within the other state’s jurisdiction to adjust the individual’s return. The Department cannot stand in another state’s place to ensure that an individual has paid income tax to at least one state.

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 reside 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.

Residency of Military Servicemembers

The Servicemembers Civil Relief Act (the “Act”), codified at 50 U.S.C. § 4001 et seq., provides that military and naval personnel do not abandon their legal domicile solely by complying with military orders that require them to take residence in a different state or country. The Act, however, does not preclude the possibility that armed forces personnel may acquire a new legal domicile in the state where they are stationed, and thus subject themselves to taxation by that state as if they were a domiciliary resident. In order for the change of domicile to occur, there must be an abandonment of the old domicile and the acquisition of a new one. This change must be exhibited by an individual’s intent and conduct. See United States of America v. Minnesota Department of Revenue, 97 F. Supp. 2d 973 (2000).

In general, the Department will not seek to tax a military service member so long as the member maintains sufficient connections with another state to indicate an intent to maintain domicile there. Such connections would include filing a State of Legal Residence Certificate (DD Form 2058), obtaining a driver’s license, registering to vote and voting in local elections, registering an automobile, and exercising other benefits or obligations of a particular state. As long as a military service member maintains such connections, they would be considered to be a resident of the other state even though they work, live, and establish a permanent place of abode in Virginia.

Commencing with 2007, the year in which he married a Virginia resident, the Taxpayer has a history of filing Virginia income tax returns. Returns were filed on both a resident and nonresident basis, both jointly with his spouse and separate, depending on the year. The Taxpayer also owned property in Virginia and, for a period of time, held a Virginia driver’s license and vehicle registration. Further, beginning in 2015, Virginia income tax began to be withheld from the Taxpayer’s military wages. The Department of Defense does not change a legal residence for purposes of state income tax withholding unless the servicemember had declared a change of legal residence and submitted DD Form 2058. See Department of Defense Financial Management Regulation 700.14-R, Volume 7A, Chapter 44, Section 2.6. Virginia income tax continues to be withheld from the Taxpayer’s military wages, suggesting that the Taxpayer has not taken steps officially to change his state of legal residence. 

The aforementioned facts raise questions concerning the Taxpayer’s residency status for the 2022 taxable year. In an attempt to gain additional information so that the Department could make an informed decision concerning his residency status, the Department sent the Taxpayer an email and letter in November 2023, requesting that the Taxpayer submit his 2022 military leave and earning statements, a copy of Form DD 2058, and a completed questionnaire. To date, the Taxpayer has failed to respond with the requested information. 

CONCLUSION

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 that he was not subject to income tax in Virginia. Furthermore, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayers’ willful failure or refusal to provide the Department with necessary information as required by law. 

Because the assessment at issue was made based on the best information available to the Department pursuant to Virginia Code § 58.1-111, the Taxpayer will be given one final opportunity to provide the requested information regarding his residency or to file a 2022 Virginia resident income tax return. The information or 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 23261-7203, Attention: *****. Upon receipt, the information or return will be reviewed, and the assessment will be adjusted, as appropriate. If the information or return is not received within the allotted time, the assessment will be considered to be correct.
 
The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/4726.X