Tax Type
Individual Income Tax
Description
VA residents out-of-state tax credits.
Topic
Persons Subject to Tax
Residency
Date Issued
02-21-2002
February 21, 2002
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which seek correction of an assessment of individual income tax issued to ***** (the "Taxpayers") for the taxable year ended December 31, 1995. I note that the tax portion of the assessment has been paid. I apologize for the delay in the department's response.
FACTS
The Taxpayers are Virginia residents who claimed out-of-state tax credits for income taxes paid to Puerto Rico and Delaware. On audit, the out-of-state tax credit for the income taxes paid to Puerto Rico was disallowed and the Taxpayers were assessed additional Virginia income tax. The Taxpayers protest this treatment and argue that either the out-of-state tax credit or a subtraction for foreign source income should be allowed. The Taxpayers further contend that without the benefit of one of these treatments, the income in question will effectively result in double taxation.
DETERMINATION
Code of Virginia § 58.1-332(A) provides a credit when a Virginia resident becomes liable to another state for income tax on any earned or business income derived from sources outside Virginia. At issue here is the meaning of state for purposes of the out-of-state tax credit.
Title 23 of the Virginia Administrative Code ("VAC") 10-110-30, copy enclosed, defines the word "state" as any state of the United States and the District of Columbia. Puerto Rico is not a state of the United States within this meaning. It is not an integral part of the United States or incorporated into the United States. Consequently, the out-of-state tax credit provisions do not apply to income tax paid by the Taxpayers to Puerto Rico.
Code of Virginia § 58.1-302 defines foreign source income, in pertinent part, as:
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- Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties.
The Taxpayers contend that if an out-of-state tax credit is not allowable, the income in question should be considered "technical fees." The department has previously ruled that the words "technical fees from .... services performed" cannot be taken out of their context to create a subtraction for income earned from the performance of services outside the United States for any service which can be characterized as of a technical nature. See Public Documents ("P.D.s") 86-209 (11/3/86) and 92-44 (4/27/92), copies enclosed. "Technical Fees" must be incidental to a contract relating to the rental of real property or the licensing of a patent or other like property located outside the United States. See P.D. 96-381 (12/20/96). Further, compensation for labor or personal services performed does not qualify as foreign source income for Virginia tax purposes regardless of its source. See Title 23 VAC 10-110-30, copy enclosed.
The department must comply with the statutory and regulatory restrictions with respect to foreign source income. Consequently, your request that the department allow either an out-of-state tax credit or a subtraction for the income in question cannot be granted.
The balance due on the assessment, ***** represents interest accrued on the assessment through the date of receipts of the Taxpayers' protest letter. Payment for ***** should be remitted within 30 days from the date of this letter to avoid the accrual of additional interest. Your payment should be sent to ***** Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23218-1880. If payment is not received within the allotted time, interest will accrue on the balance due from the date of receipt of the Taxpayer's protest letter and collection action will resume. If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/24406P
Rulings of the Tax Commissioner