Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Border credit denied for taxes paid on business income
Topic
Credits
Date Issued
07-07-1997
July 7, 1997
Re: § 58.1-1821 Application: Individual Income Tax
Dear**************
This will reply to your letter concerning your Virginia individual income tax assessment for the taxable year 1994. I apologize for the delay in responding to your letter.
FACTS
You are a Virginia resident and a sole proprietor with business locations in North Carolina and in Virginia. You filed a North Carolina income tax return to report business income received from that state. You claimed a border state out-of-state credit on the Virginia income tax return for taxes paid to North Carolina. The department audited your return and recomputed your credit by allowing the general out-of-state tax credit instead of the border state out-of-state tax credit. An assessment for additional tax and interest was issued and has been paid.
You contend that since Virginia conforms with federal income tax, Schedule C income should be considered earned income. The border state out-of-state credit, therefore, should be allowed. You are requesting that the department issue a refund of the amount paid on the assessment.
DETERMINATION
In 1989, North Carolina enacted legislation that restructured its tax to track federal taxable income instead of federal adjusted gross income (the base of Virginia tax). This change resulted in many Virginia residents who worked in North Carolina receiving reduced credits for taxes paid to that state and having to pay additional Virginia income tax at year end.
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 lessor 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. After North Carolina law change, Virginia residents working in North Carolina generally received a credit equal to a percentage of their Virginia tax, resulting in a balance due at year end. In years prior to this legislation, Virginia residents generally received a credit for tax paid to North Carolina equal to 100% of their Virginia tax liability.
In 1992, House Bill 512 was introduced into the General Assembly in order to address this change in North Carolina law. As originally introduced, the 1992 legislation would have granted broad relief to Virginia residents paying income tax to other states. A substitute version of this bill, however, was ultimately enacted to specifically address the North Carolina situation. The enacted bill was intended to grant special treatment to those individuals earning wages and salaries who commuted from Virginia to work in North Carolina on a daily basis.
Code of Virginia § 58.1-301, copy enclosed, provides that the terms used in Virginia law as it relates to Virginia individual income taxation will have the same meaning as terms used in the Internal Revenue Code (I.R.C.) unless a different meaning is clearly required. As a result, Virginia individual income tax does not conform with federal individual income tax law in all respects.
Code of Virginia § 58.1-332, copy enclosed, provides, in part, that the border state out-of-state tax credit will be computed based on earned income. For purposes of computing the out-of-state tax credit, Title 23 of the Virginia Administrative Code (VAC) 10-110-221, copy enclosed, specifically defines the terms earned or business income as follows:
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- "[E]arned income" shall mean wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered ....
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- "[B]usiness income" shall mean income derived from an activity which constitutes a "business" for federal income tax purposes for which a federal Schedule C, E, or F must be filed. (Emphasis added.)
It is clear from these definitions that the border state out-of-state credit is computed based on wages and salaries. For purposes of the Virginia out-of-state tax credit, Schedule C income is specifically identified as business income; and therefore, it may not be used in the computation of the border state out-of-state credit.
From the information presented, there is no basis for allowing Schedule C income in the computation of the border state out-of-state credit. Consequently, your assessment was properly issued and paid. If additional information is needed, please contact *****at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12633N
Rulings of the Tax Commissioner