Did a nonresident owe Virginia tax because his employer was in Virginia when he performed all work in another state?

Subject

Nonresident's out-of-state work produced no Virginia wages

Plain-English summary

Virginia abated the nonresident's entire 2003 assessment because none of his wages or S-corporation income was from Virginia sources.

The taxpayer's employer was based in Virginia, but he performed all of his work in another state. For nonresident wages, Virginia used a workday fraction: total salary multiplied by Virginia workdays divided by total workdays. With zero Virginia workdays, none of the wages were Virginia-source income.

The taxpayer also owned an interest in a second S corporation based outside Virginia. That corporation shared some owners with the Virginia employer, but the evidence showed it did not conduct enough Virginia business activity to create nexus. It therefore had no Virginia-source income passing through to the taxpayer.

What this means for you

• Employer location alone did not source a nonresident employee's wages to Virginia in this ruling.
• The physical location where the employee performed duties controlled the wage fraction.
• S-corporation income can retain Virginia-source character in the shareholder's hands, but only if the entity has Virginia-source income.
• Shared ownership with a Virginia company did not, by itself, create nexus for the separate out-of-state S corporation.

Common questions

Did the Virginia-based employer make the wages taxable in Virginia?

No. The taxpayer performed all work outside Virginia.

How did the ruling source nonresident wages?

It multiplied annual salary by Virginia workdays and divided by total workdays.

Did the out-of-state S corporation have Virginia nexus?

No, based on the business activities shown for 2003.

What happened to the assessment?

It was abated in full.

Citations and references

• Va. Code §§ 58.1-321, 58.1-341, 58.1-400, and 58.1-408 through 58.1-421.
• 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 84-90 (July 3, 1984); P.D. 88-165 (June 29, 1988).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-188

Original ruling text

November 21, 2007

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2003.

FACTS

The Taxpayer was a resident of * (State A) who worked entirely in *** (State B), and was employed by an S Corporation (Corporation A) based in Virginia. In addition, the Taxpayer is a shareholder of an S Corporation (Corporation B) based in State B that shared some common shareholders with Corporation A. In 2003, the Taxpayer filed individual tax returns in State A and State B, but not in Virginia.

The Department obtained information indicating that the Taxpayer received income from a Virginia employer. Based on this information, the Department issued an assessment for 2003. The Taxpayer contests the assessment asserting that he performed no work in Virginia.

DETERMINATION

Nonresident Salaries and Wages

Pursuant to Va. Code § 58.1-341, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Va. Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources.

For salaries and wages from an employer, the "net income, gain, loss, and deductions from Virginia sources" would be an amount equal to (1) the total annual salary from the employer, (2) multiplied by the number of days or portion thereof that the nonresident individual spent in Virginia performing duties for their employer, and (3) divided by the number of days or portion thereof spent anywhere performing duties for the employer. See Public Document (P.D.) 84-90 (7/3/1984).

In the instant case, the information provided demonstrates the Taxpayer performed all work in State B. As such, none of his wages would be subject to Virginia income tax.

Pass Through Entity Income

Virginia Code § 58.1-400 imposes income tax "on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources." Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. The existence of positive Virginia apportionment factors establishes income from Virginia sources.

Public Law (P.L.) 86-272, as codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The Department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co. , 505 U.S. 214 (1992). Although P.L. 86-272 applies to tangible property, the Department's policy has been to extend the "solicitation test" of P.L. 86-272 to situations involving the sales of services.

A taxpayer, however, that engages in activities that exceed the protection afforded by P.L. 86-272 would be subject to the Virginia income tax. Corporations (including S corporations) that have income from business both within and without Virginia are required to compute their Virginia source income in accordance with the corporate statutory formula set forth in Va. Code §§ 58.1-408 through 58.1-421. As such, S Corporations generally must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. See P.D. 88-165 (6/29/1988).

As such, income received by an S Corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. Shareholders of an S Corporation that are individuals report such income on their individual income tax returns in kind and remit the tax on behalf of the S Corporation.

The evidence shows that Corporation B did not conduct sufficient business activities in Virginia during 2003 to create nexus. As such, Corporation B did not have nexus with Virginia and had no Virginia source income.

CONCLUSION

Based on this determination, the Taxpayer is not liable for any Virginia income tax for the 2003 taxable year. As such, the Virginia individual income tax assessment issued to the Taxpayer for 2003 has been abated.

The Code of Virginia sections and public documents cited, as well as other reference documents, 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 determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1387859481B