95-282 | Virginia Tax

Tax Type

Individual Income Tax

Description

Taxes paid by residents to other states; Illinois replacement tax

Topic

Credits

Date Issued

11-06-1995

November 6, 1995

Re: § 58.1-1821 Application: Individual Income Tax

Dear***************.

This will reply to your letter of October 20, 1995, in which you protest on behalf of your clients, ***********(the "Taxpayers"), the assessment of additional individual income taxes for taxable year 1992.

FACTS

The Taxpayers, who are Virginia residents, received a distributative share of income from ownership in an S corporation (the "Corporation") with operations in Illinois, Virginia and other states. The Taxpayers claimed the out-of-state tax credit on their 1992 Virginia individual income tax return for the Illinois Replacement Tax paid by the Corporation. The department disallowed the credit, claiming that the tax paid to Illinois was a franchise or privilege tax, rather than an income tax. You request reconsideration of the department's disallowance of the credit for the Replacement Tax the Corporation paid to Illinois.

DETERMINATION

Code of Virginia § 58.1-332 provides, in relevant part:

- A. Whenever a Virginia resident has become liable to another state for income tax on any earned or business income ... the amount of such tax payable by him shall... be credited on the taxpayer's return...

- C. For purposes of this section, the amount of any state income tax paid by an electing small business corporation (S corporation) shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the stock of such corporation. (Emphasis added.)

Legislation enacted by the 1991 General Assembly (Chapters 362 and 456 of the 1991 Acts of Assembly) expressly precluded individuals from claiming a credit for franchise and similar taxes paid to other states. After the 1991 legislation, Code of Virginia § 58.1-332 A. provides:

- However, no franchise tax, license tax, excise tax, unincorporated business tax, occupation tax or any tax characterized as such by the taxing jurisdiction, although applied to earned or business income, shall qualify for a credit under this section, nor shall any tax which, if characterized as an income tax or a commuter tax, would be illegal and unauthorized under such other state's controlling or enabling legislation qualify for a credit under this section. (Emphasis added.)

The intent of this provision is to limit the individual income tax credit for taxes paid to another state to true net "income" taxes.

The Illinois tax in question is imposed pursuant to ILCS § 5/201 (c), which provides:

- Personalty replacement tax. Beginning on July 1, 1979 and thereafter, in addition to such income tax, there is also hereby imposed the Personal Property Tax Replacement Income Tax measured by net income on every corporation (including Subchapter S corporations), partnership and trust, for each taxable year ending after June 30, 1979. Such taxes are imposed on the privilege of earning or receiving income in or as a resident of this State. The Personal Property Tax Replacement Income Tax shall be in addition to the income tax imposed by subsections (a) and (b) of this Section and in addition to all other occupation or privilege taxes imposed by this State or by any municipal corporation or political subdivision thereof. (Amended L. 1984, P.A. 83-1352.) (Emphasis Added.)

The tax is imposed on the privilege of earning or receiving income. In deciding whether this is an income tax which qualifies for the Virginia credit, or a nonqualifying privilege tax, we must look to the Illinois Constitution for additional guidance. Section 3 of the Illinois Constitution provides:

- § 3. Limitations on income taxation.
  
  §3(a) A tax on or measured by income shall be at a nongraduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations. In any such tax imposed upon corporations the rate shall not exceed the rate imposed on individuals by more than a ratio of 8 to 5.

At the time that the tax was enacted, it was apparently to replace revenue lost upon the abolishment of ad valorem taxes for certain classes of property. Being cognizant of 3 of the Illinois Constitution, the following amendment was made to the Illinois Constitution:

- § 5(c) Abolition of taxes by 1-1-79.
  
  5(c) Abolition of taxes by 1-1-79. On or before January 1, 1979, the General Assembly by law shall abolish all ad valorem personal property taxes and concurrently therewith and thereafter shall replace all revenue lost by units of local government and school districts as a result of the abolition of ad valorem personal property taxes subsequent to January 2, 1971. Such revenue shall be replaced by imposing statewide taxes, other than ad valorem taxes on real estate, solely on those classes relieved of the burden of paying ad valorem personal property taxes because of the abolition of such taxes subsequent to January 2, 1971. If any taxes imposed for such replacement purposes are taxes on or measured by income, such replacement taxes shall not be considered for purposes of the limitations of one tax and the ratio of 8 to 5 set forth in Section 3(a) of this Article. (Approved by voters 12-15-70 and effective 7-1-71.) (Emphasis added.)

The Illinois General Assembly apparently considered the Personal Property Tax Replacement Income Tax to be an income tax, as evidenced by its amendment to Illinois constitutional limitations on income taxes. Illinois does, in fact, have a Franchise tax, which was not amended or changed at the time of enactment of the Replacement Tax. Obviously, if the Illinois General Assembly had intended to enact a franchise tax, it could have done so without amending § 3 of the Illinois Constitution.

In reviewing the tax, it applies to all corporations and S corporations, and is imposed on federal taxable income. It is therefore a broad-based tax, essentially equivalent to Virginia's method of taxation. Accordingly, I find that the Illinois Personal Property Tax Replacement Income Tax to be a net income tax which qualifies for the Virginia credit for taxes paid to other states.

The assessment has been paid, accordingly a refund for the tax ****and interest********* paid will be issued to the Taxpayers in due course. If you have any additional questions regarding this determination, please don't hesitate to call*****************at***************.

Sincerely,

Danny M. Payne
Tax Commissioner

OTP/10409M

Rulings of the Tax Commissioner