Did a North Carolina contractor have to withhold Virginia income tax from North Carolina employees performing construction work in Virginia?

Subject

Virginia withholding required for North Carolina employees working in Virginia

Plain-English summary

Virginia upheld withholding tax and interest against a North Carolina construction contractor whose employees worked on Virginia jobs. Employers, including nonresident employers, generally must withhold Virginia tax from wages for services performed in Virginia unless an applicable reciprocity agreement provides otherwise.

The contractor argued that it had already withheld North Carolina tax and that Virginia withholding would create double taxation. The Department rejected both points. North Carolina did not have a reciprocity agreement with Virginia, and the employer should have withheld based on the state where each employee was working.

Because the employees earned wages by performing services in Virginia, the Virginia assessments for October 2006 through December 2008 were upheld.

What this means for you

• An out-of-state employer can have Virginia withholding duties when employees work in Virginia.
• Employee residence does not by itself eliminate withholding where the work is performed.
• Reciprocity is state-specific and should be checked for the relevant period.
• Withholding tax for the employee's home state does not automatically satisfy Virginia's requirement.

Common questions

Did paying North Carolina withholding excuse Virginia withholding?

No. The ruling said Virginia withholding was still required for the Virginia work.

Why did reciprocity not protect the employees?

North Carolina had no reciprocal income-tax agreement with Virginia for the period at issue.

Were the assessments reduced?

No. The Department upheld them.

Citations and references

• Va. Code §§ 58.1-342(B), 58.1-460, and 58.1-461.
• P.D. 93-172 and P.D. 99-156, as cited in the determination.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-173

Original ruling text

August 10, 2010

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter in which you contest the assessment of withholding tax and interest issued to * (the "Taxpayer") for the period of October 2006 through December 2008.

FACTS

The Taxpayer is a construction contractor located in North Carolina that contracted to perform jobs in Virginia. Under audit, the Taxpayer was assessed for failing to withhold income tax from the wages of its employees working in Virginia.

The Taxpayer appeals the assessments, contending it was not required to withhold Virginia income tax from its employees because the withholding tax had been paid to North Carolina. Further, the Taxpayer believes that remittance of Virginia withholding tax creates double taxation.

DETERMINATION

Virginia Code § 58.1-461 requires employers to withhold taxes from employee wages for each payroll period. Virginia Code § 58.1-460 defines "employer" as "the person, whether a resident or nonresident of the Commonwealth, for whom an individual performs or performed any service as an employee ...." (Emphasis added.) Further, this section 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 ...." (Emphasis added.) Consequently, unless a state has a reciprocity agreement with Virginia, 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 wages or salary while performing services for the employer in Virginia.

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia and Pennsylvania. However, no such agreement exists with the state of North Carolina.

The Taxpayer contends that income taxes were withheld for North Carolina and, therefore, the employees' wages 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 laws of Virginia are very clear in this matter. If the Taxpayer had followed the statutory requirements, it would have withheld the appropriate income tax from the employees pay depending on the state in which the employee was working. The fact that the Taxpayer withheld North Carolina income tax from employees working in Virginia does not create double taxation.

In addition, the Department has upheld assessments issued against employers in situations analogous to that of the Taxpayer. See Public Documents 93-172 (7/29/1993) and 99-156 (6/18/1999). Accordingly, the assessments for the withholding period at issue are upheld.

The Code of Virginia sections and public documents cited are! available on-line in the Tax (Policy Library section of the Department's website, located at www.tax.virginia.gov. If you have any questions regarding this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4326982796.D