March 8, 2016
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 assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2012. I apologize for the delay in responding to your appeal.
FACTS
On their Virginia resident income tax return for the 2012 taxable year, the Taxpayers claimed a credit for payment of the District of Columbia's Unincorporated Business Franchise Tax (UBFT). Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appeal, contending that the credit should have been allowed because the income on which the UBFT was based was the husband's personal income he earned as a sole proprietor doing business in the District of Columbia.
DETERMINATION
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. The Department has ruled that the UBFT does not qualify for the credit. See Public Document (P.D.) 11-92 (6/2/2011). In addition, in 2012, the General Assembly enacted Senate Bill 681 (Chapter 292, 2012 Acts of Assembly), effective for taxable years beginning on or after January 1, 2007, to clarify and restore the Department's longstanding policy of allowing a credit only for income taxes that are similar to Virginia's individual income tax. See P.D. 12-108 (7/1/2012). This Act was codified at Va. Code § 58.1-332.2.
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 UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108.
Pursuant to Va. Code § 58.1-332.2 and in accordance with the Department's longstanding policy, the UBFT does not qualify for the credit under Va. Code § 58.1-332. The fact that the husband paid the UBFT on business income as a sole proprietor does not render the UBFT a qualifying tax under Va. Code § 58.1-332.2.
Accordingly, the assessment is correct and 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 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 determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6031720144.M