Tax Type
Individual Income Tax
Description
Virginia taxable income of a nonresident truck driver/ Owner-Operator.
Topic
Federal Conformity
Out of State Tax Credits
Persons Subject to Tax
Taxable Income
Date Issued
06-10-2013
June 10, 2013
Re: Request for Ruling: Individual Income Tax
Dear *****:
This will reply to your letter in which you request a ruling concerning nonresident truck drivers.
FACTS
A truck driver (the "Taxpayer"), a resident of ***** (State A), transported products between destinations in different states as an "over-the-road" (OTR) tractor-trailer driver. He worked as either a company driver or an owner/operator on behalf of one trucking company headquartered in Virginia. As a company driver, he was paid wages reportable on a federal wage and tax statement (Form W-2). As an owner/operator, he reported business income and expenses on Schedule C of Form 1040 as a sole proprietor. The Taxpayer requests a ruling that he is not subject to Virginia income tax citing Virginia Tax Bulletin (VTB) 91-9 (10/21/1991).
RULING
Pursuant to Va. Code § 58.1-325, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Va. Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident) by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources. Under Va. Code § 58.1-302, "income and deductions from Virginia sources" includes income from "a business, trade, profession or occupation carried on in Virginia." In addition, Va. Code § 58.1-341 requires every nonresident individual having Virginia taxable income to file an income tax return.
Virginia's conformity to federal law is set forth in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meanings as used in the Internal Revenue Code (IRC), Title 26 of the United States Code (U.S.C.), unless a different meaning is required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia.
The Taxpayer asserts that he is not subject to Virginia income tax as stated in VTB 91-9. In this tax bulletin, the Department announced certain changes to Virginia withholding requirements to conform to federal law. Specifically, the bulletin provided that payments to nonresident employees of rail carriers, motor carriers and water carriers would be exempt from Virginia withholding pursuant to 49 U.S.C. § 14503 (formerly 49 U.S.C. § 11504).
Title 49 U.S.C. § 14503(a)(1) prohibits a state from imposing a net income tax on compensation paid by certain motor carriers to an employee for performing transportation services in two or more states when the employee is not a resident of that state. The purpose of the statute is to reduce the administrative burden of complying with multiple state tax laws by employees of interstate trucking companies. Prior to the enactment of this statute, truck drivers could be required to source income to a number of different states for tax purposes simply because they drove into or through those states in order to deliver products to customers. Therefore, even if compensation paid by the trucking company to the Taxpayer arose, at least in part, from a business, trade, profession or occupation carried on in Virginia, such compensation would not be subject to Virginia's income tax laws if it satisfied all of the requirements of 49 U.S.C. § 14503.
To qualify, payments the Taxpayer received must be "compensation," a term not expressly defined in either 49 U.S.C. § 14503 or Title 58.1 of the Code of Virginia. In such circumstances, Virginia's conformity dictates it first look to the IRC in determining how a particular item would be treated for Virginia income tax purposes. Under IRC § 61(a)(1), "compensation for services" is included in a taxpayer's gross income. Compensation for services is further explained in Treas. Reg. § 1.61-2(a)(1) to include:
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- Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law.
In this case, the Taxpayer was paid wages by the trucking company during the first half of the year as a company driver. Wages paid by an employer to an employee clearly qualify as compensation. For the remainder of the year, the Taxpayer received payments for his services as an owner/operator conducting business as a sole proprietor. Such payments would generally be considered income from a business. Income derived from business constitutes a category of income separate from "compensation for services" under IRC § 61.
Title 49 U.S.C. § 14503, however, defines "employee" to include an independent contractor when operating a commercial motor vehicle. See 49 U.S.C. § 31132 (2). Independent contractors are not generally compensated through salaries or wages. See IRC 61(a)(2). Instead, they charge fees for the services they perform. Although such fees would not normally be compensation under IRC § 61 or for Virginia income tax purposes, by including independent contractor in the definition of "employee" for purposes of 49 U.S.C. § 14503, Congress intended that such fees be considered compensation under that statute. When federal law conflicts with state law, states are bound to follow federal law pursuant to the "supremacy clause" in Article 6 of the United States Constitution. Therefore, in compliance with federal law, any fees pertaining to transportation services the Taxpayer provided as an independent contractor are also not subject to Virginia income tax. To the extent any payment or part thereof may have reflected other categories of income in IRC § 61 such as gains from dealings in property or rents, it would not be considered compensation paid to an employee and thus not qualify for relief under 49 U.S.C. § 14503.
In this case, fees were paid directly to the Taxpayer who was operating as a sole proprietor. The Department expresses no opinion about the application of 49 U.S.C. § 14503 in circumstances where an independent contractor conducts business in another form, such as a corporation or partnership. The Department observes, however, that the definition of "employee" expressly excludes anyone deemed to be an employer. See 49 U.S.C. § 31132(2).
It is my understanding that the Taxpayer has filed Virginia income tax returns for several years. The Taxpayer should re-evaluate whether he has any liability for Virginia income taxes in light of the analysis in this ruling. If the Taxpayer finds that his Virginia income tax liability differs from what he has reported, he should file amended returns and attach a copy of this ruling. The documentation provided with this request included a copy of the Taxpayer's State A income tax return. A review of this return revealed the Taxpayer claimed a credit for tax paid to Virginia against his State A liability. The Taxpayer should be aware that any changes to his Virginia income tax liability may impact the out-of-state credit claimed on the State A return.
This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and public document 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 ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5360458932.M
Rulings of the Tax Commissioner