September 22, 2020
Re: § 58.1-1821 Application: Withholding Tax
Dear *****:
This will respond to your letter in which you seek correction of the withholding tax assessments issued to your client,***** (the “Taxpayer”), for the taxable periods January 2016 through December 2018.
FACTS
Under audit, the Taxpayer was assessed for failure to withhold taxes from employee wages during the taxable periods at issue. The Taxpayer appeals, contending the workers were independent contractors, not employees.
DETERMINATION
Virginia Code § 58.1-460 defines “employee” as “an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages . . . .” The Code of Virginia does not define “independent contractor” for income tax withholding purposes. Under Title 23 of the Virginia Administrative Code (VAC) 10-140-10, the relationship between an employer and employee or independent contractor is determined in accordance with the test set forth in Treas. Reg. § 31.3401(c)-1. In Public Document (P.D.) 96-280 (10/10/1996), the Tax Commissioner found that the factors enumerated in Treas. Reg. § 31.3121(d)-1 should be used as a guideline for determining whether a worker is an employee or an independent contractor.
In accordance with Virginia Code § 58.1-3 C, the Department received information concerning the Taxpayer’s workers’ classifications as employees from the VEC. The Department allowed adjustments to reflect Virginia individual income tax return information filed by the Taxpayer’s workers as provided under Virginia Code § 58.1-467. The Department’s auditor, however, does not appear to have made an independent analysis as to whether the workers were employees or independent contractors.
CONCLUSION
The assessment was based on information obtained from the VEC as authorized under Virginia Code § 58.1-3 C. While such information is helpful in identifying possible issues with withholding tax compliance, the Department’s regulations require an evaluation of an employer’s records to determine if its workers are employees or independent contractors pursuant to the factors enumerated in Treas. Reg. § 31.3121(d)-1. Accordingly, the audit will be returned to the audit staff in order to conduct a complete examination of the Taxpayer’s records as required under Title 23 VAC 10-140-10. See also Public Document 18-107 (6/6/2018).
Under the provisions of Virginia Code § 58.1-205, an assessment of a tax by the Department is deemed prima facie correct. As such, the burden of proof is on the Taxpayer to show the Department’s assessment is incorrect. Accordingly, the Taxpayer must provide sufficient documentation to support its contention that its workers were actually subcontractors for the taxable periods at issue. The fact that the Taxpayer consistently issued 1099s to such workers is insufficient proof that they should have been classified as independent contractors. Again, that determination requires an examination of the factors described above. The Taxpayer must provide documentation as requested by the audit staff. Once the examination of the documentation is completed, the assessment will be adjusted as warranted. If the Taxpayer is not satisfied with the result, it may file an appeal within 90 days of being notified of the outcome of the review pursuant to Virginia Code § 58.1-1821.
The Code of Virginia sections, regulation and public documents 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/3380.M