Document Number
Tax Type
Income Tax
Out-of-State Tax Credit and Gambling Winnings from Slot Machines
Out of State Tax Credits
Taxable Income
Date Issued

May 28, 2014

Re: Out-of-State Tax Credit and Gambling Winnings from Slot Machines

Dear *****:

This is in response to your letter to the Department of Taxation ("the Department") regarding the out-of-state tax credit and the gambling winnings that you ("the Taxpayer") received from slot machines. Because this response may be of interest to other taxpayers and practitioners, your letter is being treated as a ruling request under Va. Code § 58.1-204.


In 2010 and 2012, the Taxpayer received gambling winnings from slot machines in West Virginia and paid taxes on that income to West Virginia. For the relevant taxable years, the Taxpayer was a resident of Virginia. Pursuant to advice from her tax preparer that the out-of-state tax credit does not generally apply to gambling winnings, the Taxpayer also paid taxes on her gambling winnings to Virginia on her 2010 and 2012 income tax returns. The Taxpayer contends that the out-of-state tax credit should apply to her gambling winnings and that the double taxation of her gambling winnings is unfair and discriminatory.


Va. Code § 58.1-332 A generally allows Virginia residents to claim a tax credit for income taxes paid to another state if the income is earned or business income or gain on the sale of a capital asset. The terms "earned income" and "business income" are defined in 23 VAC 10-110-221 for purposes of the out-of-state tax credit. "Earned income" is defined as wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered. See 23 VAC 10-110-221 B2. "Business income" is defined as income derived from an activity which constitutes a business for federal income tax purposes for which federal Schedule C, E, or F must be filed. See 23 VAC 10-110-221 B3.

In addition to this general out-of-state credit, Va. Code § 58.1-342 B grants the Department the authority to enter into an agreement with another state to exempt nonresidents from the Virginia income tax when they receive compensation from working in Virginia if such other state similarly exempts Virginia residents. Virginia entered into such an agreement with West Virginia in 1988 (see enclosed). This reciprocity agreement exempts Virginia residents from the West Virginia income tax and from the requirement to file a West Virginia income tax return with regard to compensation paid in West Virginia. In exchange for this treatment, West Virginia residents are exempt from the West Virginia income tax and filing requirements for compensation paid in Virginia.

Similar to the general credit under Va. Code § 58.1-332 A, the terms of the reciprocity agreement apply only to specified types of income. For purposes of the reciprocity agreement, "compensation paid in West Virginia" is compensation described in W. Va. Code § 11-21-41, which includes salaries, wages, or compensation for personal services performed in West Virginia.

In this case, the Taxpayer received gambling winnings from slot machines located in West Virginia. The Department has held on numerous occasions that gambling winnings are generally not earned or business income for purposes of the out-of-state tax credit. See P.D. 99-47 (4/2/1999), P.D. 98-159 (10/20/1998), P.D. 95-171 (6/23/1995), P.D. 95-164 (6/22/1995), and P.D. 95-152 (6/12/1995). The Taxpayer's gambling winnings from slot machines are not earned income because the income was not compensation from professional services rendered.

Nor has the Taxpayer demonstrated that her gambling winnings consist of business income. For an individual's gambling activities to be considered a trade or business, the gambling activities must have been pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and not a mere hobby. See C.I.R. v. Groetzinger, 480 U.S. 23 (1987), and P.D. 95-152. Unless the Taxpayer provides facts showing that her gambling activities met the above requirements, the Taxpayer's gambling winnings are not considered business income and do not qualify for the out-of-state tax credit.

It is well-established that the taxation of income by more than one state is not unconstitutional. The Supreme Court held that the Due Process Clause does not prevent the taxation of personal income by more than one state. See Curry v. McCanless, 307 U.S. 357 (1939) and Graves v. Elliott, 307 U.S. 383 (1939). The Supreme Court also held that double taxation alone does not violate the Equal Protection Clause. See Illinois Cent. R. Co. v. State of Minnesota, 309 U.S. 157 (1940), Guaranty Trust Co. of New York v. Commonwealth of Virginia, 305 U.S. 19 (1938), and Ft. Smith Lumber Co. v. State of Arkansas ex rel. Arbuckle, 251 U.S. 532 (1920). Therefore, there is no legal authority preventing Virginia and West Virginia from imposing taxes on the Taxpayer's gambling income.


For the foregoing reasons, the Taxpayer will not be eligible to receive the out-of-state tax credit for gambling winnings from slot machines located in West Virginia unless she demonstrates that her gambling activities constituted a trade or business for federal income tax purposes. The Code of Virginia provisions and regulations cited, along with other reference documents, are available online in the Laws, Rules & Decisions section of the Department's website, located at If you have additional questions, please contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
                • Sincerely,

Craig M. Burns
Tax Commissioner

Last Updated 08/25/2014 16:46