Document Number
Tax Type
Individual Income Tax
New Hampshire Business Enterprise Tax
Out of State Tax Credits
Date Issued

September 6, 2016

Re:      § 58.1-1821 Application:  Individual Income Tax

Dear *****:

This will reply to your letter in which you seek reconsideration of the Department's determination letter, issued as Public Document (P.D.) 15-109 (5/29/2015), to ***** (the “Taxpayers”) for the taxable year ended December 31, 2013.  I apologize for the delay in responding to your request.


In P.D. 15-109, the Department denied the claim of credit by the Taxpayers, a husband and wife, for the New Hampshire Business Enterprise Tax (NHBET) tax paid to New Hampshire because the NHBET is not an income tax.  The Taxpayers request a reconsideration of the Department's determination, contending that the NHBET is an income tax because it is based on compensation paid to the husband.  They also assert that the recent United States Supreme Court decision, Comptroller of the Treasury of Maryland v. Wynne, 135 S. Ct. 1787, 191 L. Ed. 2d 813 (2015), requires that states provide a credit for all taxes, including the NHBET, paid to other states.


Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income or any gain on the sale of a capital asset.  The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income.

Classification of Tax

Virginia Code § 58.1-332.2 A defines an “income tax” as a term of art that refers to a specific type of tax levied on all of a resident's earned and unearned income, and all income of a nonresident from sources within the jurisdiction, which is similar to the income tax that Virginia imposes on resident and nonresident individuals.  Virginia Code § 58.1-332.2 B includes examples of taxes that do not qualify for the credit, even though they may be measured, in part, by income.  Taxes do not qualify because (i) they are labeled as a franchise or license tax, and (ii) they do not tax all income of the individual.  Examples of taxes that do not qualify for the credit pursuant to Va. Code § 58.1-332.2 include the District of Colombia's Unincorporated Business Franchise Tax, the Texas Margin Tax, and the Ohio Commercial Activity Tax.  See P.D. 12-108.

Virginia Code § 58.1-332.2 C further provides that “[t]he credits in §§ 58.1-332 and 58.1-332.1 shall apply only when the tax imposed in the other state or foreign country is substantially similar to the tax imposed by Article 2 (§ 58.1-320 et seq.), as defined by this section.” (Emphasis added.)  Thus, a tax, regardless of type, must still be substantially similar to the Virginia individual income tax imposed under Va. Code § 58.1-320 et seq., which applies generally to all of the income of Virginia residents and all of the income of nonresidents sourced to Virginia.

The Taxpayers contend that the NHBET is an income tax because the enterprise value tax base is measured by compensation.  The NHBET is imposed on the taxable enterprise value base of every profit or nonprofit corporation, partnership, limited liability company, proprietorship, association or trust, with the exception of those exempt under IRC § 501(c)(3) that do not engage in any unrelated activity, conducting business activities in the state.  See N.H. Rev. Stat. Ann. § 77-E:2.  The NHBET is assessed on the enterprise value tax base, which is the sum of all compensation paid or accrued, interest paid or accrued, and dividends paid, before special adjustments and apportionment.  See N.H. Rev. Stat. Ann. § 77-E:1.  Because the NHBET is based on expenditures made by a business enterprise, it is not an income tax substantially similar to Virginia's individual income tax.  See P.D. 15-109 (5/29/2015).

Commerce Clause

The Taxpayers also assert that Wynne requires states to provide a credit for all taxes paid to other states.  It is well established, however, that a state may tax all the income of a resident, even income from outside the taxing jurisdiction.  In People of State of New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937), the United States Supreme Court explained “What the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.”  In Wynne, the Supreme Court also recognized that a state's taxation of a resident's income may be subject to constitutional scrutiny under the Commerce Clause of the U.S. Constitution.

The Commerce Clause grants Congress power to “regulate Commerce . . . among the several States.”  Art. I, § 8, cl. 3.  Although the Clause is framed as a positive grant of power to Congress, the Court has consistently held this language to contain a further, negative command, known as the dormant Commerce Clause. Wynne, 135 S. Ct. at 1794.  The dormant Commerce Clause prohibits state taxation discriminating against interstate commerce, even when Congress has failed to legislate on the subject. Id.  To help identify state tax schemes that discriminate against interstate commerce, the Court uses something known as “the internal consistency test.”  Id. at 1803.  The test “looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.”  Wynne, 135 S. Ct. at 1803 (citations and internal quotation marks omitted).

Accordingly, a state is within its authority to impose income tax on all of the income of a resident of that state.  A state need only ensure that the income tax, to the extent that it substantially affects interstate commerce, does not discriminate against such commerce.  While granting a credit against a resident's income tax may cure an otherwise discriminatory tax, the Supreme Court in Wynne did not order that.  In fact, the Court noted that alternative remedies existed, one of which would be for the state to refrain from taxing nonresidents on certain income.  Wynne, 135 S. Ct. at 1806.

Critically, not all situations of double taxation are a result of discriminatory tax schemes. The Court explained:

By hypothetically assuming that every State has the same tax structure, the internal consistency test allows courts to isolate the effect of a defendant State's tax scheme.  This is a virtue of the test because it allows courts to distinguish between (1) tax schemes that inherently discriminate against interstate commerce without regard to the tax policies of other States, and (2) tax schemes that create disparate incentives to engage in interstate commerce (and sometimes result in double taxation) only as a result of the interaction of two different but nondiscriminatory and internally consistent schemes...The first category of taxes is typically unconstitutional; the second is not.

Id. (citations omitted).

If a court were to subject Virginia's credit to the internal consistency test it would assume that all states, including New Hampshire, imposed a broad-based income tax like Virginia's and would not analyze the actual taxes imposed by each of the other states. Under that assumption Virginia would grant the credit for income taxes imposed by the other states and no discrimination would be found to exist that could be attributed to Virginia's tax structure.  The fact that a credit has been denied for the NHBET is attributable to the fact that New Hampshire has imposed a tax that is significantly different from Virginia's income tax. This situation fits into the second type of result of the internal consistency test, which does not violate the Commerce Clause of the U.S. Constitution.


Based on the evidence provided, the NHBET is not an out-of-state income tax that qualifies for the credit under Va. Code § 58.1-332.  Accordingly, the Department correctly denied the Taxpayers' out-of-state credit claimed on their 2013 return and the assessment remains due and payable.  An updated bill will be issued shortly to the Taxpayers.  The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections and public documents cited are available on-line at in the Laws, Rules & Decisions section of the Department's web site.  If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.


Craig M. Burns
Tax Commissioner






Rulings of the Tax Commissioner

Last Updated 10/06/2016 07:23