Tax Type
Employer Income Tax Withholding
Description
Failure to Withhold
Topic
Withholding of Tax
Date Issued
10-26-1998
October 26, 1998
Re: Sec. 58.1-1821 Application: Withholding Tax
Dear *****
This will reply to your letter in which you contest the assessment of withholding tax against ***** (the "Taxpayer') for 1993 and 1994. I apologize for any the delay in responding.
FACTS
The Taxpayer is an out-of-state contractor who was subject to a field audit. Some of its contracting work is performed in Virginia. For the periods of January 1993 through December 1994, the Taxpayer was assessed tax, penalty, and interest for failure to withhold taxes from certain individuals whom the Taxpayer classified as independent contractors.
The Taxpayer contends that the assessments are incorrect because the individuals who work for it are properly classified as independent contractors.
DETERMINATION
Code of Virginia Sec. 58. 1-460 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....' The Code of Virginia does not define "independent contractor' for withholding tax purposes. Nevertheless, federal law provides certain factors to distinguish between an employee and an independent contractor.
Treasury Regulation Sec.31.3121(d)-1 provides these factors, and is summarized in Internal Revenue Service Publication 937. The 20 factors enumerated in this publication are used as a guideline for determining whether a worker is an employee or an independent contractor. These factors, however, are not the only elements considered when determining the classification of workers.
The Taxpayer was formerly a partner in contracting business. All workers were treated as independent contractors and no income tax was withheld. The Internal Revenue Service ("IRS') audited the Taxpayer's partnership and determined that the partners were employees. The partnership entered into an agreement with the IRS to treat workers in the 1992 tax year and all subsequent years as employees. The partnership was not required to treat workers from prior years as employees. The partnership was subsequently dissolved and the Taxpayer continued the business as a sole proprietorship.
The Taxpayer has not furnished any substantive documentation to refute the classification of the individuals as employees other than a general statement that an investment portfolio is maintained separate from its regular business operations. In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. As such, the Taxpayer must prove by clear and cogent evidence that the individuals in its employ were independent sub-contractors. Based upon the information provided, the Taxpayer has not met the burden of proof. Accordingly, the assessment must be upheld.
The department requested additional information to substantiate your claim that the individuals in question are sub-contractors by letter on March 2, 1998. Inasmuch as you have not responded to our inquiry, we have made this determination based on the best available information. The department will, however, review any additional information you can provide which substantiates your claim, providing we receive it within 30 days of the date of this letter. Please send this additional information to at Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880. If we receive no response within 30 days, this case will be considered closed. If you have any questions, please call ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11300B
Re: Sec. 58.1-1821 Application: Withholding Tax
Dear *****
This will reply to your letter in which you contest the assessment of withholding tax against ***** (the "Taxpayer') for 1993 and 1994. I apologize for any the delay in responding.
FACTS
The Taxpayer is an out-of-state contractor who was subject to a field audit. Some of its contracting work is performed in Virginia. For the periods of January 1993 through December 1994, the Taxpayer was assessed tax, penalty, and interest for failure to withhold taxes from certain individuals whom the Taxpayer classified as independent contractors.
The Taxpayer contends that the assessments are incorrect because the individuals who work for it are properly classified as independent contractors.
DETERMINATION
Code of Virginia Sec. 58. 1-460 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....' The Code of Virginia does not define "independent contractor' for withholding tax purposes. Nevertheless, federal law provides certain factors to distinguish between an employee and an independent contractor.
Treasury Regulation Sec.31.3121(d)-1 provides these factors, and is summarized in Internal Revenue Service Publication 937. The 20 factors enumerated in this publication are used as a guideline for determining whether a worker is an employee or an independent contractor. These factors, however, are not the only elements considered when determining the classification of workers.
The Taxpayer was formerly a partner in contracting business. All workers were treated as independent contractors and no income tax was withheld. The Internal Revenue Service ("IRS') audited the Taxpayer's partnership and determined that the partners were employees. The partnership entered into an agreement with the IRS to treat workers in the 1992 tax year and all subsequent years as employees. The partnership was not required to treat workers from prior years as employees. The partnership was subsequently dissolved and the Taxpayer continued the business as a sole proprietorship.
The Taxpayer has not furnished any substantive documentation to refute the classification of the individuals as employees other than a general statement that an investment portfolio is maintained separate from its regular business operations. In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. As such, the Taxpayer must prove by clear and cogent evidence that the individuals in its employ were independent sub-contractors. Based upon the information provided, the Taxpayer has not met the burden of proof. Accordingly, the assessment must be upheld.
The department requested additional information to substantiate your claim that the individuals in question are sub-contractors by letter on March 2, 1998. Inasmuch as you have not responded to our inquiry, we have made this determination based on the best available information. The department will, however, review any additional information you can provide which substantiates your claim, providing we receive it within 30 days of the date of this letter. Please send this additional information to at Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880. If we receive no response within 30 days, this case will be considered closed. If you have any questions, please call ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11300B
Rulings of the Tax Commissioner