Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Credit for taxes paid to North Dakota
Topic
Credits
Date Issued
08-26-1996
August 26, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear*********
This will reply to your letter of November 13, 1995 in which you request an adjustment to the credit for income tax paid to North Dakota for the taxable year 1993 on behalf of your client, **********(the "Taxpayer"). I apologize for the delay in responding.
FACTS
During tax year 1993, the Taxpayer received business income from North Dakota. The calculation of the Virginia out-of-state tax credit for taxes paid on such income was adjusted by the department. You dispute the department's adjustment and request a refund based on your computation of the out-of-state credit.
DETERMINATION
Code of Virginia § 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. This code section, in pertinent part, limits the amount of the credit:
-
- The credit allowable under this section shall not exceed . . . such proportion of the income tax otherwise payable by him under this chapter as his income upon which the tax imposed by the other state was computed bears to his Virginia taxable income upon which the tax imposed by this Commonwealth was computed .... (Emphasis added)
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 lessor of: (i) the amount of tax actually paid to the other state (the "tentative credit"); or (ii) the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state (the "limitation"). The limitation is computed by multiplying the individual's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income.
On the North Dakota return, the resident income tax is derived by multiplying the federal tax liability by a flat percentage (14 percent). For nonresidents, the North Dakota source income is divided by the Federal Adjusted Gross Income to yield a nonresident allocation percentage. This percentage is then applied to the federal tax liability to compute the "adjusted federal income tax liability." The nonresident tax is calculated by multiplying the "adjusted federal income tax liability" by 14 percent. At issue here is what constitutes the amount of income on which the North Dakota nonresident tax is based for purposes of computing the limitation imposed by Code of Virginia § 58.1-332(A).
Because the North Dakota nonresident tax return does not identify the specific amount of North Dakota income subject to taxation, a special adjustment is required to determine the allowable out-of-state credit for Virginia. The allocation percentage calculated on the North Dakota return and applied to the federal tax liability, must also be applied to the federal taxable income to determine the North Dakota income subject to taxation. The result is used in the numerator of the fraction to compute the limitation imposed by Code of Virginia § 58.1-332(A).
This method of deriving income subject to taxation by another state, under these special circumstances, is wholly consistent with Virginia law and the instructions for computing the credit. Further, the department believes this procedure conforms to the intent of the limitation language of Code of Virginia § 58.1-332(A) by determining the proper amount on which the North Dakota nonresident tax is actually imposed.
In this particular case, using the aforementioned method to compute the allowable Virginia out-of-state credit on the Taxpayer's return results in a full credit for the tax paid on the North Dakota nonresident return. Accordingly, your request for relief is granted. The balance of the Taxpayer's 1993 refund will be issued as shown on the enclosed schedule. Should you have any questions regarding this matter, please contact ******** at ********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10564M
Rulings of the Tax Commissioner