Could a North Carolina resident claim a Virginia nonresident credit for North Carolina tax on Virginia S-corporation income?

Subject

North Carolina does not practice reciprocity with Virginia

Plain-English summary

A North Carolina resident could not claim Virginia's nonresident credit for North Carolina tax paid on Virginia-source S-corporation income. The taxpayer filed a 2008 Virginia nonresident return and tried to offset the Virginia liability with tax paid to North Carolina.

Va. Code § 58.1-332(B) made the nonresident credit reciprocal. It applied when the taxpayer's home state gave Virginia residents a substantially similar credit or imposed tax on Virginia-source income that Virginia exempted.

The ruling states that North Carolina did not allow an income-tax credit to nonresidents. Because North Carolina did not offer the required reciprocal treatment, Virginia disallowed the credit and upheld the additional tax and interest.

What this means for you

• Virginia's nonresident credit depended on the law of the taxpayer's home state.
• Paying tax to two states did not itself create the Virginia credit.
• The broader categories eligible under subsection B still remained subject to the reciprocity condition.
• The ruling specifically addressed the law applied to the taxpayer's 2008 return.

Common questions

What income produced the Virginia liability?

Income from a Subchapter S corporation located in Virginia.

Why was the credit denied?

North Carolina did not grant nonresidents a substantially similar income-tax credit.

What happened to the assessment?

Virginia upheld it, with payment due within 30 days of the updated bill to avoid additional interest.

Citations and references

• Va. Code § 58.1-332(B).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-205

Original ruling text

September 7, 2010

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 your client, * (the "Taxpayer"), for the taxable year ended December 31, 2008.

FACTS

The Taxpayer, a resident of North Carolina, received income from a Subchapter S Corporation located in Virginia. The Taxpayer filed a 2008 Virginia nonresident income tax return and claimed a tax credit for the income tax paid to North Carolina. Under audit, the Department disallowed the tax credit and assessed additional tax and interest. The Taxpayer appeals the assessment, contending that reciprocal credits are appropriate.

DETERMINATION

Virginia Code § 58.1-332 B provides a credit to nonresidents on income from Virginia sources when their home state provides a substantially similar credit to Virginia residents or imposes a tax upon the income derived from Virginia sources that is exempt from taxation by Virginia. This credit does not contain the same limitations as the credit under Va. Code § 58.1-332 A. Accordingly, the credit available to nonresidents is not limited to earned or business income. However, because it is dependent on another state granting a similar credit, it may be limited by the credit permitted by the other state.

North Carolina does not allow an income tax credit to nonresidents. Because North Carolina does not practice reciprocity with Virginia for purposes of claiming the individual income tax credit on nonresident individual income tax returns under Va. Code § 58.1-332 B, the Taxpayer was not permitted to claim an individual income tax credit for taxes paid to North Carolina on income from Virginia sources.

Accordingly, the assessment is upheld. An updated bill will be mailed to the Taxpayer. The outstanding balance must be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia 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,

Linda Foster

Deputy Tax Commissioner

AR/1-4453025096.D