April 28, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2013.
FACTS
On their Virginia resident income tax return for the 2013 taxable year, the Taxpayers claimed a credit for payment of the District of Columbia's Unincorporated Business Franchise Tax (UBFT). Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appealed, contending that the credit should have been allowed because the UBFT qualifies as an income tax paid to another state and the credit was necessary to avoid double taxation.
DETERMINATION
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. The Department has ruled that the UBFT does not qualify for the credit. See P.D. 11-92 (6/2/2011). In addition, in 2012, the General Assembly enacted Senate Bill 681 (Chapter 292, 2012 Acts of Assembly), effective for taxable years beginning on or after January 1, 2007, to clarify and restore the Department's longstanding policy of allowing a credit only for income taxes that are similar to Virginia's individual income tax. See P.D. 12-108 (7/1/2012). This Act was codified at Va. Code § 58.1-332.2.
Virginia Code § 58.1-332.2 A defines an "income tax" as a term of art that refers to a specific type of tax levied on all of a resident's earned and unearned income, and all income of a nonresident from sources within the jurisdiction, which is similar to the income tax that Virginia imposes on resident and nonresident individuals. Virginia Code § 58.1-332.2 B includes examples of taxes that do not qualify for the credit, even though they may be measured, in part, by income. Taxes do not qualify because (i) they are labeled as a franchise or license tax, and (ii) they do not tax all income of the individual. Examples of taxes that do not qualify for the credit pursuant to Va. Code § 58.1-332.2 include the UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108.
In addition, the risk of double taxation does not affect the application of Va. Code § 58.1-332.2. Courts have long recognized that the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event. It is also a long established principle that the risk of double taxation does not violate a taxpayer's constitutional rights. In Guaranty Trust Co. of New York v. Commonwealth of Virginia, 305 U.S. 19 (1938), the United States Supreme Court held that the imposition of an income tax under Virginia laws on income received as beneficiary of a trust established in New York did not violate the Due Process Clause of the Constitution, notwithstanding that the trust was also subject to tax in New York. Nor did such treatment deny equal protection under the United States Constitution.
Pursuant to Va. Code § 58.1-332.2 and in accordance with the Department's longstanding policy, the UBFT does not qualify for the credit under Va. Code § 58.1-332. Accordingly, the assessment is correct and remains due and payable. An updated bill will be issued shortly to the Taxpayers. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.
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 *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5952436069.M