Document Number
95-108
Tax Type
Individual Income Tax
Description
Taxes paid by resident to New York; Computation of credit
Topic
Credits
Date Issued
05-09-1995
May 9, 1995



Re: §58.1-1821 Application: Individual Income Tax


Dear*********************

This will reply to your letter of October 4, 1994, in which you protest the reduction of a credit for income tax paid to another state claimed by your clients,************** (the "Taxpayers"), for taxable year 1990.
FACTS

The Taxpayers, had income from New York sources during 1990. The Taxpayers filed a New York nonresident return and paid income tax to that state. Because the Taxpayers' New York source income was of the type that qualifies for a credit against Virginia income tax liability under Code of Virginia §58.1-332(A), the Taxpayers computed and claimed this credit for 1 990.

The Taxpayers' return was subject to an office audit and the credit for New York taxes paid was adjusted, resulting in an assessment. The department recomputed the Taxpayers' credit in accordance with the method described in Public Document ("P.D.") 94-91, (3129194). In P.D. 94-91, the department ruled on the proper method by which a Virginia resident computes a credit for taxes paid to New York.

You believe the method described in P.D. 94-91 is inequitable because it results in the Taxpayers being subject to an effective tax rate which is greater than Virginia's top marginal rate for individuals. Therefore, you believe the Taxpayers should be permitted to use an alternative method to compute the credit.
DETERMINATION

In a recent ruling, the department reexamined its determination in P.D. 94-91 in light of a final decision in Brady v. State of New York, 80 N.Y.2d 596 (1992), cert. denied, 113 S.Ct. 2998 (1993). See P.D. 95-96, (511195), copy attached. In this ruling, the department distinguishes between the income of a nonresident that is actually subject to tax by New York versus how New York; determines the rates at which a nonresident's income will be taxed.

In the instant case, you contend the method described in P.D. 94-91 creates an inequitable result for the Taxpayers, and therefore an alternative method of computing the credit is appropriate. You support your contention by presenting the department with computations indicating that certain effective tax rates applicable to the Taxpayers exceed Virginia's top marginal rate for individuals.

You have computed two effective tax rates by comparing the Taxpayers' net Virginia tax (i.e. the Virginia tax net of the credit for tax paid to New York) to a modified computation of Virginia Adjusted Gross Income and Virginia Taxable Income. Essentially, your computation compares net Virginia tax to income bases which exclude the Taxpayers' income from New York sources.

An effective tax rate is simply an arithmetic expression of a tax liability divided by the amount of a tax base. However, your calculations do not reflect that the Virginia tax base of a resident includes income from ail sources. If consideration is given to the entire tax base, the effective tax rate'; imposed on the Taxpayers are considerably different from those you have presented. By comparing the net Virginia income tax imposed on the Taxpayers to their Virginia Adjusted Gross Income and Virginia Taxable Income, as defined in Code of Virginia §58.1-322, you will derive effective tax rates of 1.45% and 1.83%, respectively.

The department believes that its method for computing the Virginia credit to be fair and equitable in the instant case for the reasons set forth in P.D. 95-96. Therefore, the department must deny your request for the use of an alterative method in computing the credit.

Accordingly, the assessment is correct. Attached is a schedule indicating the remaining balance of the assessment. The balance should be paid in full within 30 days to avoid accrual of additional interest. Please forward your payment to the Office of Tax Policy, the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282.
                        • Sincerely,



                          Danny M. Payne
                          Tax Commissioner



OTP/8840L

Rulings of the Tax Commissioner

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