February 15, 2022
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 assessments issued to ***** (the “Taxpayers”) for the taxable years ended December 31, 2018, and 2019.
FACTS
The Taxpayers, a husband and wife, filed joint resident Virginia income tax returns for the 2018 and 2019 taxable years and claimed credits for income tax paid to California. Under review, the Department denied the credits and issued assessments. The Taxpayers appealed, contending they could claim credit for tax they paid to California as nonresidents and the denial of the credit results in impermissible double taxation.
DETERMINATION
Generally, Virginia Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. This code section further states:
The credit . . . shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by subsection B of this section.
Under Virginia Code § 58.1-332 B, a nonresident is permitted to claim a credit against tax on income from Virginia sources when their state of residency provides a substantially similar credit to Virginia residents or imposes a tax upon their income derived from Virginia sources but does not tax income earned in the state by Virginia residents. Because it is dependent on another state granting a similar or reciprocal credit, it may be limited by the credit permitted by the other state. Currently, only residents of Arizona, California, Oregon and the District of Columbia may qualify for this credit.
Virginia law generally does not allow a resident to claim a credit on his Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on the California nonresident return. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return. Virginia is one of the few such “reverse credit” states acknowledged by California as indicated in the Franchise Tax Board’s instructions for completing Form 540 Schedule S, Other State Tax Credit.
Under certain circumstances, the Department has permitted a credit for income tax paid to California. See Public Document (P.D.) 97-98 (2/24/1998) and P.D. 07-207 (12/5/2007). The Department has also addressed a number of issues under which the out-of-state credit would not be permitted. See P.D. 95-175 (6/28/1995), P.D. 12-156 (10/04/2012) and P.D. 13-118 (6/27/2013).
In this case, the Taxpayers have not demonstrated that they could not claim the credit on their California nonresident return. In addition, it has been the Department’s policy that when reciprocity states such as California place limits on reciprocity such that taxpayers are unable to claim credit on the nonresident state return, Virginia will allow the credit on the Virginia resident return. As such, it is premature to conclude that this is an instance where the Taxpayers are being subject to double taxation.
Accordingly, based on the information provided, the Department properly disallowed the credit for income tax paid to California on the Taxpayers’ Virginia return. Therefore, the assessments are upheld. The Taxpayers will receive updated bills which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.
The Taxpayer should file amended California nonresident returns to claim the credits. If California finds out-of-stare credits claimed are not permitted under California law for reasons other than its statute of limitation, the Taxpayers may seek reinstatement of the credits by filing amended Virginia returns within one year of California’s final determination. See Virginia Code §§ 58.1-311.1 and 58.1-1823 (v).
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/3702.B