Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; New York source income
Topic
Credits
Date Issued
03-29-1994
March 29, 1994
Re: §58.1-1821 Application: Individual Income Tax
Dear***********
This will reply to your letter of November 5, 1993 in which you request the correction of an assessment issued against you and your wife concerning the calculation of the Virginia out-of-state tax credit on income earned from New York sources.
Facts
During taxable year 1990, you earned income from New York. Your calculation of the Virginia out-of-state tax credit for taxes paid on such income was calculated using a method inconsistent with the method used by the department. You request, therefore, special permission to use an alternative method of calculating the Virginia out-of-state tax credit.
Determination
Your protest primarily focuses on the department's calculation of the out-of-state tax credit for income taxes you paid to New York on income earned during taxable year 1990. The New York calculation for determining the amount of nonresident income subject to taxation is based upon a percentage of income earned in New York as compared to income earned everywhere. Unlike most states, New York determines the amount of tax on income earned from all sources and then applies this percentage to the total tax amount to determine the amount of tax due to New York. Other states, including Virginia, more typically apply the percentage of income from sources located within its borders as compared to income earned from all sources to the total taxable income amount. The tax rates are then applied to the prorated taxable income amount to determine the amount of taxes-owed to such other state. Pursuant to Va. Code §58.1-332, a resident individual is allowed a credit for taxes paid to another state on earned or business income. The amount of the credit is, however, limited to the lesser of the income tax paid to the other state or the income tax otherwise payable to Virginia multiplied by the ratio of the taxable income of the other state to Virginia taxable income.
Since the New York nonresident tax return does not identify the specific amount of New York source income subject to taxation, a special adjustment is required to determine the out-of-state credit Virginia allows. The allocation percentage calculated on the New York return, which is applied to the total tax to determine the tax due to New York, must be applied to the amount of New York taxable income to isolate the New York source income. The tax that would be due to Virginia on the computed New York source income then must be compared to the tax paid to New York. The lesser of the two is the amount of the out-of-state credit.
This allocation method is wholly consistent with Virginia law and the instructions for computing the Virginia credit. It also more accurately represents a comparison of the Virginia tax due on the income earned from New York sources and the tax paid to New York as opposed to your proposed alternative method. Therefore, your request is hereby denied. A bill will be sent to you in the next few days.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OPT75020
Rulings of the Tax Commissioner