Which state's income tax should a Virginia tugboat company withhold from nonresident crew working on multistate waters?

Subject

Department cannot rule on the federal limitations relating to the Virginia withholding

Plain-English summary

A Virginia company operated tugboats in several states. The employees at issue lived in another state and worked as regularly assigned crew on a tugboat traveling interstate waterways, including Virginia.

Virginia law generally required withholding for anyone performing services in Virginia. Federal law limited that rule. Section 14503 directed a water carrier to file withholding statements in an employee's residence state or a state where the employee earned more than 50% of carrier pay in the preceding year. Section 11108, as quoted in the ruling, protected a master, officer, or crew member on a vessel operating in more than one state's navigable waters from another state's income-tax laws.

Under either provision, the company had to withhold State A income tax for its State A employees. But the two statutes appeared to conflict over possible Virginia withholding from nonresidents: one used a more-than-50% earnings rule, while the other limited taxation to the residence state. The Department therefore declined to rule on the federal limits governing Virginia withholding.

What this means for you

• Ordinary state withholding rules may be displaced by occupation-specific federal law for water-carrier and vessel employees.
• Employee residence, regular duties, vessel routes, and the share of pay earned in each state can all matter.
• The ruling did not resolve whether Virginia could withhold from nonresident tugboat crew under the conflicting federal provisions.

Common questions

Did the company have to withhold for the State A employees?

Yes. The ruling said State A income tax had to be withheld from State A residents.

Did Virginia decide whether it could also require withholding?

No. It expressly declined to resolve the apparent federal statutory conflict.

Did Virginia treat tugboat operators as water carriers?

Yes, for purposes of 49 U.S.C. § 14503.

Citations and references

• Va. Code §§ 58.1-460 and 58.1-461, employee definition and employer withholding.
• 49 U.S.C. § 14503, water-carrier employee withholding.
• 46 U.S.C. § 11108(b)(2)(B), multistate vessel crew income-tax limitation.
• Virginia Tax Bulletin 91-9, federal exceptions to Virginia withholding.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-115

Original ruling text

July 19, 2007

Re: Request for Ruling: Withholding Tax

Dear *:

This will reply to your letter in which you request a ruling concerning the withholding of income tax for employees of * (the "Taxpayer").

FACTS

The Taxpayer, located in Virginia, operates tugboats in several states. Several employees who work aboard one tugboat reside in * ("State A"). This boat travels the intercoastal waterways from State A and stops in several other states on the east coast of the United States, including Virginia. You request a ruling regarding the state withholding requirements for those employees.

RULING

Virginia Code § 58.1-461 provides that employers must withhold taxes on wages of employees. Virginia Code § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages, or a resident of the Commonwealth who performs or performed any service . . . outside the Commonwealth for wages." As such, an employee who earns wages while performing services in Virginia must have tax withheld regardless of whether the employee is a resident or a nonresident of Virginia. Usually, when an employee is a resident of Virginia, all of his wages are subject to withholding.

Federal law contains a number of limitations on states' withholding requirements. The Department previously addressed the exceptions in Virginia Tax Bulletin 91-9 (10/21/91). For instance, and relevant to the situation presented, the Tax Bulletin lists as exempt from Virginia withholding payments to nonresident employees of rail carriers, motor carriers and water carriers, pursuant to Title 49 U.S.C.A. § 11504 and payments to resident and nonresident seaman pursuant to Title 46 U.S.C.A. § 11108.

In 1996, Title 49 U.S.C.A. § 11504 was repealed and replaced by Title 49 U.S.C.A. § 14503. Pursuant to Title 49 U.S.C.A. § 14503, a water carrier must file income withholding statements only in states where its employees reside or in the state in which the employee earned more than 50% of the pay received from the carrier for the preceding year. Tugboat operators are water carriers for purposes of this section.

Further, Title 46 U.S.C.A. § 11108(b)(2)(B) provides that an individual "who performs regularly-assigned duties while engaged as a master, officer, or crewman on a vessel operating on the navigable waters of more than one State" is not subject to the income tax laws of a state other than the state in which the individual resides. The Taxpayer's tugboat workers are crewmen who are engaged in regularly assigned duties on a vessel operating on the navigable water of several different states.

Under either one of these federal statutes, the Taxpayer is required to withhold income tax from the employees' state of residence. As such, the Taxpayer would be required to withhold State A income tax from State A employees.

In regard to a Virginia tugboat company's requirement to withhold Virginia income tax from nonresident employees, there appears to be a conflict in the federal statutes. Title 49 U.S.C.A. § 14503 requires withholding in the state in which a nonresident employee earned more than 50% of the pay received. Title 46 U.S.C.A. § 11108 limits a seaman's income tax liability to the state in which the individual resides. Because of the direct conflict between these two sections, the Department cannot rule on the federal limitations relating to the Virginia withholding requirements for payments to the Taxpayer's nonresident employees.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and Tax Bulletin cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, please contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-307595910B