Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Out-of-state tax credit
Topic
Credits
Date Issued
05-10-1988
May 10, 1988
Re: Request for Ruling/Individual Income Tax
Dear******************
This will reply to your letter dated February 8, 1988 in which you wish to know whether a Virginia resident who is a shareholder in a Tennessee S corporation can claim a credit for Tennessee excise taxes paid by the S corporation in determining his Virginia individual income tax.
FACTS
********** (taxpayer) represents two Virginia residents who are shareholders in an S corporation which is incorporated in the State of Tennessee. The S corporation will pay Tennessee excise tax on its earnings. The shareholders will report their pro-rata share of the S corporation earnings on their Virginia return. Since Virginia provides an out-of-state tax credit to individuals for taxes paid to another state on earned or business income from sources outside of Virginia, taxpayer wishes to know if the Virginia shareholders are eligible for this credit on the excise tax paid to Tennessee by the S corporation.
RULING
§58.1-332 of the Code of Virginia provides credits for taxes paid to other states by residents and nonresidents of Virginia. §58.1 332(C) of the Code of Virginia states:
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- For purposes of this section, the amount of any state income tax paid by an electing small business corporation (S corporation) shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the stock of such corporation.
The out-of-state tax credit is clearly limited under the above statute to an income tax liability incurred on non-Virginia source income to another state. For Virginia individual income tax purposes, the Tennessee excise tax is not considered a state income tax. While the Tennessee excise tax may be measured by net income, the tax is a privilege tax imposed for the right of doing business as a corporation and exercising corporate powers in the state of Tennessee. Therefore, the Tennessee excise tax is not creditable against Virginia individual income tax as an income tax paid to another state.
I hope the foregoing information has been helpful. If you have any further questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner