Document Number
Tax Type
Individual Income Tax
Domicile; lump-sum severance payment
Date Issued

March 16, 2005

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the Virginia individual income tax assessment issued to ***** for the 2000 taxable year. I apologize for the delay in the Department's response.


In 1994, the Taxpayer, a Virginia resident, signed a noncompetition and nonsolicitation agreement with his employer. In September 1999, the employer terminated the Taxpayer's employment. At that time, the Taxpayer signed a termination agreement that provided for a lump-sum severance payment and additional periodic payments to the Taxpayer. In December 1999, the Taxpayer moved to ***** ("State A") to begin a new job.

The former Virginia employer made a lump-sum payment to the Taxpayer in 1999 and made periodic payments to the Taxpayer in 1999 and 2000. The Virginia employer withheld Virginia income tax from those payments. The Taxpayer filed a 2000 nonresident individual income tax return, claimed that the payments were received in State A, and requested a refund of Virginia individual income tax withheld. Under audit, the Department determined that the payments were taxable by Virginia as severance payments made by a Virginia employer to a terminated employee, and adjusted the Taxpayer's return accordingly.

The Taxpayer contends that the term "severance" is misused, and the payments were actually compensation for compliance with a noncompete agreement executed with the former employer. The Taxpayer requests correction of the assessment and a refund of the amounts withheld.


Severance pay is compensation for the termination of an employment relationship or is deemed to be remuneration for past services. Public Document ("P.D.") 97-123 (3/10/97) states that severance pay is considered Virginia source income to a nonresident individual when paid by a Virginia employer.

In the case presented, the Taxpayer was a domiciliary resident of Virginia working for a Virginia employer. As the result of an involuntary separation, the Taxpayer signed a separation agreement that provided for a severance allowance. The allowance included a lump-sum severance payment and periodic severance payments. The periodic payments were contingent upon the Taxpayer complying with all terms and conditions set forth in the separation agreement, which included compliance with the noncompetition and nonsolicitation agreement.

Based on the additional information presented, I agree that the periodic payments received in 1999 and 2000, labeled in the termination agreement as "severance," are not severance payments provided because of termination of employment. Further, income received by a nonresident from a former Virginia employer for a promise not to compete is not considered income from Virginia sources and, therefore, is not taxable by Virginia. See P.D. 02-151 (12/10/02). Accordingly, the assessment issued for the 2000 taxable year will be abated and a refund will be issued shortly.

The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
              • Sincerely,

                  • Kenneth W. Thorson
                    Tax Commissioner


Last Updated 08/25/2014 16:46