Was income earned after moving out of Virginia taxable when a former employee performed all subcontractor services for the Virginia company from another state?

Subject

Post-move services performed outside Virginia were not Virginia-source income

Plain-English summary

Virginia excluded the husband's post-move contractor income from Virginia-source income. The couple moved from Virginia to State A in May 2005. Until the move, the husband was a Virginia domiciliary resident and Virginia taxed all of his income.

In June, he signed a subcontract with his former Virginia employer. The Department found that every service under that contract was performed in State A. Once he was no longer a Virginia domiciliary or actual resident, Virginia could tax only income tied to Virginia property or a business, trade, profession, or occupation conducted in Virginia.

Working for a Virginia customer did not by itself source the income to Virginia. Because the contractor performed the services outside Virginia, the income was not Virginia-source, and the couple's 2005 part-year return had to be processed accordingly.

What this means for you

• A part-year resident owes Virginia resident tax through the date of the domicile change.
• After the move, nonresident sourcing depends on where the income-producing activity is conducted, not merely where the customer is located.
• Services physically performed outside Virginia for a Virginia company were not Virginia-source under these facts.
• Clear evidence of the domicile-change date and work location matters.

Common questions

Was the husband taxed by Virginia before the May move?

Yes. As a Virginia domiciliary resident, all income through the residency period was subject to Virginia tax.

Did contracting with a former Virginia employer make later income Virginia-source?

No. The services were all performed in State A after the domicile change.

What did Virginia direct?

The couple's 2005 part-year resident return was to be processed consistently with the determination.

Citations and references

• Va. Code §§ 58.1-303, 58.1-325, and 58.1-302.
• 23 VAC 10-110-40.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-144

Original ruling text

September 29, 2009

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 "Taxpayers") for the taxable year ended December 31, 2005.

FACTS

The Taxpayers, a husband and wife, moved from Virginia to * ("State A") in May 2005. The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayers had income for the 2005 taxable year. Pursuant to a request by the Department, the Taxpayers filed a Virginia part-year resident income tax return. The Department reviewed the return, attributed additional income earned after the Taxpayer moved to State A as attributable to Virginia sources and issued an assessment. The Taxpayers contest the assessment, stating the husband was a contractor for his former Virginia employer after the move to State A and such income is not income from Virginia sources.

DETERMINATION

Virginia Code § 58.1-303 provides that a person who moves from Virginia during a taxable year remains subject to taxation for the period of Virginia residency. Title 23 of the Virginia Administrative Code 10-110-40 provides that individuals who are residents of Virginia for only part of a taxable year are only taxed as residents for that portion of the year that they reside in Virginia.

In this case the husband was employed by a Virginia business until he moved to State A in May 2005, and became a domiciliary resident of that state. Until that time, he was a domiciliary resident of Virginia. As a domiciliary resident of Virginia, all of the Taxpayer's income was subject to income taxation by Virginia. If the Taxpayer's domicile had not changed to State A, his income would have continued to be taxable by Virginia, regardless of where earned.

In June 2005, he signed a contract to work for the Virginia business as a subcontractor. The evidence indicates that while the husband continued to perform work for the same Virginia employer, all contractual services were performed in State A.

Under Va. Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1-302 in turn limits the term income and deductions from Virginia sources to the items of income gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia. After the husband became a resident of State A, none of the services he performed for his Virginia employer was attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia. As such, the income he earned as a subcontractor in State A was not income from Virginia sources.

Accordingly, the Taxpayers' 2005 part-year resident income tax return will be processed in accordance with this determination. The Taxpayers will be advised of any adjustments to the return.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely;

Janie E. Bowen

Tax Commissioner

AR/1-2416189945.E