Could Maryland residents recover Virginia tax withheld from Virginia wages when amended returns followed a later Maryland audit?

Plain-English summary

Virginia allowed the refund because Maryland reciprocity exempted the couple's wages and a special one-year filing rule made the amended returns timely. Both spouses were Maryland domiciliaries. The wife worked in Virginia, but Virginia's reciprocal agreement with Maryland exempted qualifying wages earned here by Maryland residents.

Maryland audited the couple and issued 2005 and 2006 assessments in November 2010. The couple then filed amended Virginia returns in August 2011 seeking the Virginia tax that had been withheld.

Virginia generally had denied the claims as outside the ordinary refund period. But when another state's final change affects Virginia liability, the taxpayer has one year from that determination to amend the Virginia return. The August 2011 claims fell within one year of Maryland's assessments.

Virginia therefore processed the amended returns and ordered the appropriate refunds with interest.

Common questions

Q: Why were the Virginia wages exempt?
A: The taxpayers were Maryland residents covered by the Virginia-Maryland wage reciprocity agreement.

Q: Why did the late-looking refund claims remain timely?
A: They were filed within one year of Maryland's final change to the same tax years.

Citations and references

• Va. Code § 58.1-342(B).
• Va. Code §§ 58.1-311.1 and 58.1-1823(A)(v).

Subject

Taxpayers were not subject to Virginia income tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-104

Original ruling text

June 19, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of individual income tax paid by * (the "Taxpayers") for the 2005 and 2006 taxable years. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, were domiciliary residents of Maryland during the taxable years at issue. The husband was employed in Maryland and the wife was employed in Virginia, but both had Virginia income tax withheld from their wages. The Taxpayers filed Virginia nonresident income tax returns for the 2005 and 2006 taxable years. The Taxpayers did not file Maryland income tax returns.

Maryland audited the Taxpayers and issued assessments. In August 2011, the Taxpayers filed amended Virginia returns for the 2005 and 2006 taxable years, requesting a refund. The Department disallowed the refunds because the returns were filed after the statutory period for issuance of a refund had expired.

The Taxpayers filed an appeal, contending they were not aware of the reciprocal agreement between Maryland and Virginia. They assert that the wife's income was exempt from Virginia income taxation and payment of the tax is due to Maryland.

DETERMINATION

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.

In this case, the Taxpayers were not subject to Virginia income tax on the wages they earned in Virginia. When Maryland audited the Taxpayers, assessments were issued for the 2005 and 2006 taxable years in November 2010. As a result, the Taxpayers filed amended Virginia returns claiming refunds for 2005 and 2006 in August 2011.

When a taxpayer's income tax reported on a return filed with any other state for any taxable year is changed or corrected by such other state and such change effects the taxpayer's Virginia income tax liability, Va. Code §§ 58.1-311.1 and 58.1-1823 A (v) require such taxpayer to file an amended return within one year from the final determination of a change made by any other state.

Because the Taxpayers filed the amended returns within the one-year period set forth under Va. Code § 58.1-1823 A (v), the returns are considered to be timely filed. Accordingly, the Taxpayer's amended returns will be processed and the appropriate refunds, including refund interest, will be issued.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4915799400.E