Tax Type
Individual Income Tax
Description
Excise tax paid to another state; Out-of-state tax credit
Topic
Credits
Taxable Income
Date Issued
07-31-2000
July 31, 2000
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 1996. I apologize for the delay in responding to your letter.
FACTS
You are a Virginia resident and shareholder in an S corporation headquartered in State A. The S Corporation received income from State B. As State B does not recognize the S Corporation election, the S Corporation was required to file a franchise-excise tax return with State B. You claimed an out-of-state tax credit on your 1996 Virginia individual income tax return for excise taxes paid by the S Corporation to State B and passed through to you as a shareholder. The department disallowed the credit as it was based on an excise tax, and an assessment was issued. You have paid the assessment. You, however, contend that the excise taxes paid to State B should be allowed in the computation of the out-of-state credit on your individual income tax return. Further, you contend that your payment of the assessment should be refunded.
DETERMINATION
Code of Virginia § 58.1-332(A), copy enclosed, which addresses credits for taxes paid to other states, provides in part that:
[N]o franchise tax, license tax, excise tax, unincorporated business tax, occupation tax or any tax characterized as such by the taxing jurisdiction, although applied to earned income or business income, shall qualify for a credit under this section, nor shall any tax which, if characterized as an income tax or a commuter tax, would be illegal or unauthorized under such other state's controlling or enabling legislation qualify for a credit under this section. (Emphasis added.)
As a result, a tax characterized as an "excise tax" by a state would clearly not qualify for the out-of-state tax credit for Virginia tax purposes. In the instant case, the tax of State B is not characterized as a state income tax. Instead, it is characterized as an excise tax imposed on the S Corporation for the privilege of doing business as a corporation and exercising its corporate franchise in that state. Consequently, the excise tax paid to State B and passed through the S Corporation to you is not allowable in the computation of your Virginia out-of state tax credit.
Based on the information presented, there is no basis for allowing an out-of-state tax credit on your 1996 Virginia individual income tax return attributable to excise taxes paid by the S Corporation to State B. The department properly issued the assessment. If you have further questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/28310N
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 1996. I apologize for the delay in responding to your letter.
FACTS
You are a Virginia resident and shareholder in an S corporation headquartered in State A. The S Corporation received income from State B. As State B does not recognize the S Corporation election, the S Corporation was required to file a franchise-excise tax return with State B. You claimed an out-of-state tax credit on your 1996 Virginia individual income tax return for excise taxes paid by the S Corporation to State B and passed through to you as a shareholder. The department disallowed the credit as it was based on an excise tax, and an assessment was issued. You have paid the assessment. You, however, contend that the excise taxes paid to State B should be allowed in the computation of the out-of-state credit on your individual income tax return. Further, you contend that your payment of the assessment should be refunded.
DETERMINATION
Code of Virginia § 58.1-332(A), copy enclosed, which addresses credits for taxes paid to other states, provides in part that:
[N]o franchise tax, license tax, excise tax, unincorporated business tax, occupation tax or any tax characterized as such by the taxing jurisdiction, although applied to earned income or business income, shall qualify for a credit under this section, nor shall any tax which, if characterized as an income tax or a commuter tax, would be illegal or unauthorized under such other state's controlling or enabling legislation qualify for a credit under this section. (Emphasis added.)
As a result, a tax characterized as an "excise tax" by a state would clearly not qualify for the out-of-state tax credit for Virginia tax purposes. In the instant case, the tax of State B is not characterized as a state income tax. Instead, it is characterized as an excise tax imposed on the S Corporation for the privilege of doing business as a corporation and exercising its corporate franchise in that state. Consequently, the excise tax paid to State B and passed through the S Corporation to you is not allowable in the computation of your Virginia out-of state tax credit.
Based on the information presented, there is no basis for allowing an out-of-state tax credit on your 1996 Virginia individual income tax return attributable to excise taxes paid by the S Corporation to State B. The department properly issued the assessment. If you have further questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/28310N
Rulings of the Tax Commissioner