Did a Virginia investment LLC with no employees or Virginia property have to withhold tax for its nonresident member?

Plain-English summary

The Department found that this investment LLC had no Virginia-source income subject to pass-through withholding. The Virginia LLC was owned by several Virginia residents and one nonresident. Its income came from savings accounts, certificates of deposit, stocks, bonds, and royalty interests, and the evidence showed no employees, Virginia real estate, or tangible property.

Virginia's statute required a pass-through entity to withhold when it had taxable income derived from or connected with Virginia sources that was allocable to a nonresident owner. The Department explained that an entity established solely to invest in intangible personal property, with no employees and no real or tangible property, was not carrying on a Virginia trade or business; its intangible income therefore was not Virginia-source income under the cited Department guidance.

The LLC's withholding tax for the year ended December 31, 2008 was refunded with interest. The assessment of penalty and interest for late withholding was abated.

What this means for you

• Virginia formation alone did not make this entity's intangible investment income Virginia-source income under the ruling's facts.
• The absence of employees, real estate, tangible property, and an operating trade or business was central to the result.
• An entity with operating activity, Virginia property, employees, or differently sourced royalty income may receive a different answer.
• The ruling addressed the 2008 tax year and should not replace a current-law withholding analysis.

Common questions

Q: Why was withholding not required?
A: The Department found no Virginia trade or business and no Virginia-source income under the entity's stated facts.

Q: What happened to the tax already paid?
A: It was refunded with interest.

Q: What happened to the late-withholding assessment?
A: The penalty and interest were abated.

Citations and references

• Va. Code § 58.1-486.2(A) and (B)(1).
• Virginia Public Document 94-275 (September 16, 1994).
• Virginia Tax Bulletin 05-6 (May 6, 2005).

Subject

Taxpayer did not have taxable income subject to the withholding requirement.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-202

Original ruling text

December 6, 2012

Re: § 58.1-1821: Withholding Tax

Dear *:

This will reply to your letter in which you contest the assessment of penalty and interest issued to * (the "Taxpayer") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer was a Virginia limited liability company that was owned by several Virginia residents and one domiciliary resident of * (State A). The Taxpayer generated income from its ownership interest in savings accounts, certificates of deposit, stocks, bonds and royalty income. The Taxpayer filed its nonresident withholding tax return and remitted withholding tax on behalf of a nonresident member after the due date. The Department issued an assessment for penalty and interest to the Taxpayer for failing to timely withhold income tax for income attributed to the nonresident member.

The Taxpayer appeals the assessment, contending it did not have taxable income subject to the withholding requirement. It also asserts that the pass-through entity withholding requirement violates the Due Process Clause and Commerce Clause of the United States Constitution.

DETERMINATION

Virginia Code § 58.1-486.2 A provides that "a pass-through entity that has taxable income for the taxable year derived from or connected with Virginia sources, any portion of which is allocable to a nonresident owner" must pay withholding tax. The amount of tax that must be withheld is equal to 5% of the nonresident owner's share of income from Virginia sources of all nonresident owners that may lawfully taxed by Virginia and which is allocable to a nonresident owner. See Va. Code § 58.1-486.2 B 1.

Virginia pass-through entities that are established solely to invest in intangible personal property, such as stocks and bonds, and that have no employees, and no real or tangible property are not considered to be carrying on a trade or business. See Public Document (P.D.) 94-275 (9/16/1994) and Tax Bulletin (VTB) 05-6 (5/6/2005). Thus, income from the intangible property held by an investment pass-through entity is not income from Virginia sources. As such, pass-through entities that are established solely to invest in intangible personal property and have no employees and no real or tangible property are not required to withhold Virginia income tax.

The Taxpayer generated income from its ownership interest in savings accounts, certificates of deposit, stocks, bonds and royalty income. The evidence does not indicate that the Taxpayer had any employees, real estate, or tangible property in Virginia. As such, the Taxpayer was not considered to be carrying on a trade or business in Virginia and did not have income from Virginia sources. Accordingly, the withholding tax paid by the Taxpayer for the taxable year ended December 31, 2008 will be refunded with interest. The assessment of the penalty and interest has been abated.

The Code of Virginia sections and public documents cited, along with other reference documents, 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 regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4549541689.B