Tax Type
Employer Income Tax Withholding
Description
Nonresident employer; Obligation to withhold
Topic
Withholding of Tax
Date Issued
09-27-1996
September 27, 1996
Re: § 58.1 -1821 Application: Withholding Tax
Dear***********
This will reply to your letter and meeting with the department in which you applied for correction of an assessment for withholding taxes to ******** (the "Taxpayer") for the periods January 1989 through December 1994. I apologize for the delay in responding.
FACTS
The Taxpayer is a North Carolina wholesaler with customers in North Carolina and Virginia. The Taxpayer employs sales personnel who travel throughout the two states to establish client contact, obtain orders, and perform such other duties as required by their employer. For the periods January 1989 through December 1994, the Taxpayer was assessed tax and interest for failure to withhold taxes from certain sales employees who performed services in Virginia.
You contend the Taxpayer is not liable for the assessments on the basis that its employees spend less than one-half of their time performing services in Virginia, withholding taxes are withheld for the employees' state of residence, and the assessment on a North Carolina resident working for a North Carolina company is unconstitutional for reasons including, but not limited to, the burden on interstate commerce.
DETERMINATION
Code of Virginia § 58.1-461 requires employers to withhold taxes from employee wages for each payroll period. Code of Virginia § 58.1-460 defines "employer" as, "[T]he person, whether a resident or a nonresident of the Commonwealth, for whom an individual performs or performed any service as an employee ...." (Emphasis added) Further, this section defines "employee" as, "[A]n individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages ...." (Emphasis added) Consequently, an employer located outside of Virginia may be required to withhold Virginia income taxes for an employee who is not a resident of Virginia when that employee earns income from Virginia sources.
The Taxpayer contends that its employees spend less than one-half of their time performing services in Virginia. This reference is in regard to Public Law (P.L.) 101-322, codified at 49 U.S.C.A. § 11504(b). Prior to July 6, 1990, the predecessor statute, P.L. 95-473, required an employer to withhold employee income tax only for the state in which the employee earned more than 50 percent of his income. If the employee did not spend more than 50 percent of his time in any one state, the employer was required to withhold tax only for the state of the employee's residence.
Effective July 6, 1990, however, 49 U.S.C.A. § 11504(b)(1) was changed to provide that compensation paid to employees of a private motor carrier performing regularly assigned duties in two or more states is only subject to the income tax laws of the employee's residence. Subsection (2) provides that the term "employee" has the meaning as provided in 49 U.S.C.A. § 31132(2) which consists of "an operator of a commercial motor vehicle . . . a mechanic, a freight handler, or an individual . . . who . . . directly affects commercial motor vehicle safety in the course of employment ...." In light of the foregoing, the department's audit was not based on employees who operated commercial motor vehicles. The assessment was based solely on the Taxpayer's sales personnel who performed services in Virginia.
The Taxpayer also contends that income taxes were withheld for the employees' resident state of North Carolina and, therefore, should not be subject to Virginia withholding. North Carolina does not practice reciprocity with Virginia concerning the income taxation of nonresidents. As a result, employers paying wages to residents of North Carolina for services performed in Virginia are required to withhold Virginia income tax from such wages regardless of whether or not North Carolina taxes are withheld.
The Taxpayer further states that an assessment on a North Carolina resident working for a North Carolina company is unconstitutional. The department has previously ruled on this issue. See Public Documents (P.D.) 95-56 (3/27/95), 94-262 (8/18/94), and 94-208 (7/05/94), copies enclosed. In these cases, the issue surrounded the perceived lack of the requisite nexus to impose withholding tax requirements when the taxpayer had no physical or economic presence in Virginia. The department ruled that the presence of employees within Virginia clearly constitutes the requisite nexus to impose withholding tax collection responsibilities.
In Code of Virginia § 58.1-460, the term "wages" corresponds to the definition under Internal Revenue Code (IRC) § 3401(a), as well as any other amounts from which federal income tax is withheld under the provisions of IRC §§ 3402 and 3405. The remuneration paid to the Taxpayer's sales employees while performing services in Virginia constitutes wages and therefore is subject to withholding.
Several different methods exist to determine the amount of wages subject to withholding. The method an employer utilizes should be the one which provides the most accurate reflection of actual Virginia source income. In the instant case, it is my understanding that the employees in question were compensated on the basis of commissions earned from customer accounts. Thus, it was proper for the auditor to use commissions earned from Virginia accounts to determine the wages subject to withholding. The audit will be adjusted, however, to reflect the Virginia individual return information filed by your employees.
As provided in Code of Virginia § 58.1-475, penalty and interest shall be imposed where any employer fails to properly withhold Virginia payroll taxes. Pursuant to Code of Virginia § 58.1-467, the payment of Virginia income taxes by the wage recipient shall in no case relieve the employer from liability for penalties or additions to the tax for failure to withhold. Given the clear language of the Code, there is no basis for abating the interest. Further, no penalty has been assessed.
Unfortunately, based upon the information provided with your appeal and the August 10, 1995 meeting, the department must deny your request for relief. Our analysis of this case based on the points raised at our meeting and in our subsequent research of these issues concludes that the theory leading to this assessment was correct. The assessment for the periods January 1989 through December 1994 will be adjusted based upon the individual return information as previously stated. For your convenience, enclosed is a schedule of the revised assessment amounts with interest accrued through the date of your appeal. The bills should be paid within 30 days to avoid the accrual of additional interest. Please remit your payment to ***** Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, VA 23218-1880. Should you have any questions regarding this matter, you may contact her at****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9588M
Rulings of the Tax Commissioner