December 28, 2021
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the denial of the individual income tax refund requested by your client, ***** (the “Taxpayer”), for the taxable year ended December 31, 2018. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer filed an amended Virginia resident income tax return for the 2018 taxable year claiming a credit for Unincorporated Business Franchise Tax (UBFT) paid to the District of Columbia. Under review, the Department disallowed the credit and denied the requested refund. The Taxpayer appeals, contending the tax paid qualifies for Virginia’s credit for taxes paid to other states and granting the credit is necessary to prevent double taxation.
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 consistently ruled that tax paid pursuant to the UBFT does not qualify for the out-of-state tax credit. See Public Document (P.D.) 11-92 (6/2/2011), P.D. 15-89 (4/28/2015), P.D. 18-166 (9/26/2018), and P.D. 19-107 (9/18/2019). In addition, Virginia Code § 58.1-332.2 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 nonresidents 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 if (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 Virginia Code § 58.1-332.2 include the UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108 (7/1/2012).
The Taxpayer asserts that because the income reported on her UBFT return is business income, it qualifies for the out-of-state tax credit as it is not wage income covered by the multi-state compact with the District of Columbia. This argument, however, is irrelevant because the Virginia statute specifically prohibits a credit for the UBFT. In addition, the Department has determined that the risk of double taxation from denying credit for UBFT paid does not result in an unconstitutionally discriminatory tax scheme. See P.D. 19-107.
Pursuant to Virginia Code § 58.1-332.2 A and in accordance with the Department's longstanding policy, the UBFT does not qualify for the out-of-state tax credit under Virginia Code § 58.1-332. In addition, the risk of double taxation does not require the allowance of the credit. Accordingly, the Department’s disallowance of the credit on the Taxpayer’s amended 2018 return and consequent denial of the refund are upheld.
The Code of Virginia sections 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/3600.X