Tax Type
Individual Income Tax
Description
Credit for Taxes Paid to Other States
Topic
Clarification
Credits
Date Issued
04-14-2005
April 14, 2005
Re: Ruling Request: Credit for Taxes Paid to Other States
Dear *****:
This is in response to your letter of December 16, 2004, in which you requested a ruling on the Credit for Taxes Paid to Other States (the "Credit"). I apologize for the delay in this response.
FACTS
You are writing to inquire whether a new tax on Maryland nonresidents will be allowed in the computation for the Credit when filing a Virginia individual income tax return. You state that the rate of the new tax is determined by the lowest county tax rate and that the revenue gained from this tax goes to the general fund of the state of Maryland.
RULING
Maryland and Virginia currently have a reciprocal agreement, which states that neither state will tax the other's residents for compensation earned in the nonresident state under certain conditions. It is only when this agreement does not apply that individuals are eligible for the Credit.
Va. Code § 58.1-322(A) states that, "Whenever a Virginia resident has become liable to another state for income tax on any earned or business income or any gain on the sale of a capital asset ...the amount of such tax payable by him shall ...be credited on the taxpayer's return ...." This credit applies only to state income taxes. In Department of Taxation v. John C. Smith, et al., 232 Va. 407, 411 (1986), the Supreme Court of Virginia stated that, "the local income tax ...is not an 'income tax to the state' within the meaning of our Code ...and therefore does not qualify for the credit against Virginia income taxes ...." Thus, taxes that are classified as local do not qualify for the Credit.
The state of Maryland passed a law during the 2004 legislative session, which states that, "An individual subject to the State income tax under § 10-105(a) of this subtitle, but not subject to the county income tax under § 10-106 of this subtitle, shall be subject to the tax imposed under this section." Md. Tax-General Code Ann. § 10-106.1. Essentially, this bill is designed to capture revenue from nonresidents who are subject to the state income tax but pay no county income tax. The rate of this new tax is equal to the lowest county income tax rate set by any Maryland county. Id. Currently, this rate is 1.25%.
The revenue resulting from this law is not distributed in the same manner as that of a local income tax. After making various required distributions, the law states that the "Comptroller shall distribute the remaining income tax revenue from individuals to the General Fund of the state." Md. Tax-General Code Ann. § 2-609. This is different from the county income tax, which is distributed to the county imposing the tax. Md. TaxGeneral Code Ann. § 2-608.
Therefore, although the new Maryland tax has a rate equivalent to that of the lowest county income tax, it is not a local tax. The fact that the revenues from this tax are distributed to the General Fund of the state demonstrates that it is a state tax. Because of this, it will qualify for the Credit.
I trust that this reply answers your ruling request. Copies of the Code of Virginia sections cited are included for reference purposes. These and other reference documents are also available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov. If you should have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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PD53908
COMMONWEALTH Of VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN:
Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate to Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective January 10, 2003, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 13th day of January 2003.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Gerald H. Gwaltney Date: January 13, 2003
Done this 13th day of January 2003 in the City of Richmond, State of Virginia. My Commission expires 9-30-2003
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner