February 08, 2022
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessments issued to ***** (the “Taxpayers”) for the taxable years ended December 31, 2019 and 2020.
FACTS
The Taxpayers, a husband and wife, filed joint Virginia individual income tax returns for the 2019 and 2020 taxable years and claimed a credit each year for income tax paid to Maryland. Under audit, the Department denied the credits because of Virginia’s reciprocal agreement with Maryland and issued assessments. The Taxpayers filed an appeal, contending they are not liable for the additional tax because they were entitled to claim an out-of-state credit for income tax paid to Maryland. In the alternative, the Taxpayers request that the Department waive any interest on the assessments.
DETERMINATION
Reciprocity
Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia, and Pennsylvania.
In this instance, the Taxpayers filed a nonresident income tax return and reported income the husband earned in Maryland to Maryland. Under the Reciprocal Income Tax Agreement between the Commonwealth of Virginia and the State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only. If Virginia residents have Maryland income tax withheld from wages earned while commuting to work in Maryland, they should file income tax returns with Maryland in order to receive a refund.
After filing their appeal, the Taxpayers informed the Department that they requested a refund from Maryland in accordance with the reciprocal agreement.
Out-of-State Tax Credit
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid to another state provided the income is either earned or business income or gain on the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997).
The Taxpayers contend they should be allowed a tax credit on their Virginia return because income tax was paid to Maryland. Under Virginia law, an individual may be eligible for the credit for tax paid to another state only when the reciprocal agreement does not apply.
Interest Waiver
The Taxpayers request that interest be abated because of the ambiguity they believe exists in situations like theirs. The application of interest to tax underpayments is mandatory under Virginia Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due to the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.
CONCLUSION
Because the Taxpayers were not residents of Maryland in 2019 or 2020, and the husband’s income from the Maryland employer consisted only of wages, the Taxpayers were exempt from income taxation by Maryland under the reciprocal agreement. In addition, they were not eligible to claim a credit for income tax paid to Maryland on their Virginia income tax return.
Accordingly, the assessments for the 2019 and 2020 taxable years are upheld. Updated bills with accrued interest to date will be issued shortly. The Taxpayers should remit payment for the outstanding balance within 30 days of the bill date to avoid any collections actions.
The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. 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/3867-C