Tax Type
Individual Income Tax
Description
Reciprocity/ Virginia law, limits compensation of remuneration paid to employees.
Topic
Out of State Tax Credits
Records/Returns/Payments
Date Issued
08-07-2014
August 7, 2014
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2010.
FACTS
The Taxpayers, a husband and wife, are residents of Virginia. In 2010, the husband was hired by a university located in Pennsylvania to teach a class in ***** (Country A). The university paid the husband an honorarium for this service.
The Taxpayers filed a 2010 Pennsylvania income tax return as nonresidents and remitted tax on the income received from the university. They filed a Virginia resident income tax return claiming an out-of-state credit for the tax paid to Pennsylvania.
Under review, the Department disallowed the out-of-state tax credit on the basis that no tax should have been paid to Pennsylvania due to the reciprocal income tax agreement between Pennsylvania and Virginia. The Taxpayers paid the assessment in full and filed an appeal, contending the reciprocal agreement did not apply because the university's payment was not compensation as provided under the agreement.
DETERMINATION
Reciprocity
Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia, and Pennsylvania.
Section II B 2 of the Reciprocal Income Tax Agreement between Commonwealth of Virginia and Commonwealth of Pennsylvania (the "Reciprocal Agreement") provides that "[n]o Virginia resident . . . shall be required to file a Pennsylvania income tax return on compensation paid in Pennsylvania." [Emphasis Added.] In addition, Section II B 5 of the Reciprocal Agreement states:
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- Nothing in this agreement shall be interpreted to exempt a resident of Pennsylvania or Virginia who has taxable income in the Commonwealth of nonresidence other than in the form of compensation from liability for payment of income tax or filing an income tax return with regard to such other taxable income (emphasis supplied).
- Nothing in this agreement shall be interpreted to exempt a resident of Pennsylvania or Virginia who has taxable income in the Commonwealth of nonresidence other than in the form of compensation from liability for payment of income tax or filing an income tax return with regard to such other taxable income (emphasis supplied).
Accordingly, when Virginia residents have Pennsylvania salary or wage compensation and other Pennsylvania taxable income, they must file a nonresident return to report and pay tax only on the other income. The information presented on appeal suggests the husband was not an employee of the university. Instead, he was acting as an independent contractor and the honorarium was not compensation under the Reciprocal Agreement.
Credit for Taxes Paid Other States
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia income tax return for taxes paid to another state provided the income is either earned or business income. For purposes of the credit, "earned income" includes wages, salaries, or professional fees and other amounts received for professional services actually rendered. See Title 23 of the Virginia Administrative Code (VAC) 10-110-221 B 2. In order to be eligible for the credit, however, Va. Code § 58.1-332 A requires a Virginia resident to "become liable to another state for income tax."
In this case, the honorarium earned by the husband may be considered a fee received for services actually rendered in Country A. According to the Taxpayers, the husband taught a class to students participating in the university's summer program in Country A. Under the contract, the university did not claim right to direct or control the husband's teaching. The husband chose the subject of the class, exercised complete control over the subject matter covered, and controlled all aspects of the classroom presentations and interactions with students. Further, the agreement did not require advanced approval for the materials used in the class. The Taxpayers further indicated the husband's only connection to the university was teaching one course in Europe during the summer of 2010. In fact, the Taxpayers state the husband has never been to the university's campus. This raises the question as to whether the income from the university was actually subject to income tax in Pennsylvania.
Under Pa. Stat. Ann. § 7301(k), income from Pennsylvania sources includes, among other things, income from a trade, profession or occupation carried on within the commonwealth. Thus, in order for a nonresident to be subject to Pennsylvania's tax for income derived from providing services, it appears the services must have been performed within Pennsylvania. If the honorarium was subject to Pennsylvania income tax, the Taxpayers would be allowed to claim a credit on their Virginia return for the amount of tax paid to Pennsylvania. If, however, the Taxpayers were not liable for Pennsylvania income tax on the honorarium, the Taxpayers would not be able to claim the out-of-state credit even though they paid Pennsylvania income tax.
CONCLUSION
According to the Reciprocal Agreement, an out-of-state credit cannot be claimed in Virginia for the tax paid in Pennsylvania derived from compensation. Under Virginia law, compensation is limited to remuneration paid to employees. Based on the information provided, the husband was not an employee of the university and did not receive compensation for purposes of reciprocity with Pennsylvania. Therefore, the Reciprocal Agreement would not prevent the Taxpayers from claiming a credit for the tax paid on the honorarium.
However, because there is a question as to whether the honorarium was subject to Pennsylvania income tax, the Taxpayers must show they were actually liable for Pennsylvania income tax in order to be eligible for the credit permitted under Va. Code § 58.1-332 A. Documentation of such liability should be sent to the Virginia Department of Taxation, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: ***** within 60 days of the date of this letter. If the requested documentation is not received within the prescribed time period, the Department's adjustment disallowing the out-of-state tax credit on their 2010 income tax return will be deemed correct and no refund will be issued.
The Code of Virginia sections and regulation cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5596236010B
Rulings of the Tax Commissioner