Could a Virginia resident claim a Virginia credit for West Virginia and Maryland tax withheld from wages covered by reciprocity?

Plain-English summary

Virginia denied the credit because reciprocity meant the wages were not taxable by West Virginia or Maryland. The Virginia resident worked in all three states, and the employer withheld tax for each jurisdiction.

Virginia's reciprocal agreements with West Virginia and Maryland allowed Virginia residents commuting to work there to have wage tax paid only to Virginia. Withholding by the other states did not create a substantive tax liability.

Because the taxpayer was not legally subject to West Virginia or Maryland income tax on these wages, he could not use those withheld amounts as a Virginia other-state credit. The ruling directed the taxpayer to file returns with those states to obtain refunds of their withholding.

Common questions

Q: Does tax withholding automatically establish eligibility for an other-state credit?
A: No. The taxpayer must actually be liable for qualifying tax to the other state.

Q: How could the taxpayer recover the West Virginia and Maryland withholding?
A: By filing returns with those states for refunds under the reciprocal agreements.

Citations and references

• Va. Code §§ 58.1-332(A) and 58.1-342(B).
• Virginia Public Document 97-301 (July 7, 1997).

Subject

Taxpayer was not eligible for an out-of-state tax credit.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-105

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 correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2009.

FACTS

The Taxpayer, a resident of Virginia, worked for his employer in Virginia, West Virginia, and Maryland. The employer withheld state income tax from his wages for all three states. On his 2009 Virginia income tax return, the Taxpayer claimed a credit for taxes paid to another state. The Department disallowed the out-of-state tax credit and issued an assessment. The Taxpayer appeals the assessment.

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.

Virginia's reciprocity agreements with West Virginia and Maryland permit Virginia residents commuting daily to these states to have taxes withheld and paid to Virginia only. If a Virginia resident has West Virginia or Maryland income tax withheld from wages earned while commuting to work in these states, he should file an income tax return with those states in order to receive a refund.

In this case, the Taxpayer was a domiciliary resident of Virginia during 2009, and his only income from West Virginia and Maryland was limited to wages. As such, he was a nonresident of West Virginia and Maryland during 2009 and exempt from income taxation by West Virginia and Maryland under the applicable reciprocal agreement.

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income or gain on the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997).

Because the Taxpayer was not subject to income tax in West Virginia or Maryland, he was not eligible for an out-of-state tax credit on his 2009 Virginia return. Accordingly, the assessments are upheld and are now due and payable. An updated bill will be issued shortly to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4959015955.E