Did an out-of-state employer owe Virginia withholding for employees working in Virginia when it lacked detailed payroll records?

Plain-English summary

Virginia upheld the estimated withholding assessment for employees who performed services in Virginia. The corporation was located in another state but sent employees into Virginia and did not register or withhold Virginia income tax.

Because it lacked detailed employee records, the auditor estimated Virginia payroll from the contracts performed here. The employer's proposed method produced an immaterially different result, supporting the reasonableness of the estimate.

The employer also sought to remove low-wage employees who might owe little or no Virginia tax. Virginia said adjustments could be made only from Virginia individual-return information showing that an employee actually paid the tax. If an employee pays the wage tax, the employer remains liable only for penalty and interest on the amount it failed to withhold.

Common questions

Q: Can an employer outside Virginia have Virginia withholding duties?
A: Yes. The ruling applies withholding to wages for services employees perform in Virginia.

Q: Was another state's income-tax return enough to remove an employee?
A: No. Virginia would adjust only for information from a Virginia return filed by the employee.

Citations and references

• Va. Code §§ 58.1-111, 58.1-460, 58.1-461, and 58.1-467.

Subject

Taxpayer was assessed for failing to withhold from its employees working in Virginia.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-75

Original ruling text

May 9, 2012

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter submitted on behalf of your client, * (the "Taxpayers"), in which you seek correction of the withholding tax assessments issued for the taxable periods July 2005 through June 2011.

FACTS

The Taxpayer, a corporation located in * (State A), sent employees into Virginia to perform services on behalf of the Taxpayer. The Taxpayer did not register to remit Virginia employer withholding tax. The Taxpayer did not maintain detailed employee records for the periods at issue. Under audit, the Department estimated the amount of payroll based on contracts performed in Virginia, and the Taxpayer was assessed for failing to withhold from its employees working in Virginia for the taxable periods at issue.

The Taxpayer paid the assessments and filed an appeal. The Taxpayer disagrees with the auditor's methodology for determining the amount of the unremitted withholding tax and requests removal of certain employees because their income may have resulted in little or no tax.

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 "[t]he 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 "[a]n individual, whether a resident or a nonresident of the Commonwealth , who performs or performed any service in the Commonwealth for wages ...." (Emphasis added). Consequently, an employer located outside Virginia may be required to withhold Virginia income taxes for an employee who is not a resident of Virginia when that employee earns income from Virginia sources.

The Taxpayer contends that the method used by the auditor to determine the amount of Virginia payroll does not accurately reflect activity conducted in Virginia. The Taxpayer's proposed method, however, produces a result that is immaterially different from the auditor's computation.

Pursuant to Va. Code § 58.1-111, the Department has the authority to estimate the amount of taxes due, based on any available information, when a taxpayer fails to file a valid state tax return. The auditor made a reasonable attempt to estimate the Taxpayer's Virginia payroll. The Taxpayer's alternative computation supports the reasonableness of the estimate.

The Taxpayer also requests that certain low wage employees be removed from the audit because they would have been required to pay little or no Virginia income tax. As evidence, the Taxpayer provided copies of the employees' State A income tax returns to show the amount they paid to State A. In most cases, the employees were issued refunds for almost all of the tax withheld for State A purposes.

In the audit, the Department applied a lower rate of withholding tax to the payroll of these employees. Further, Virginia Code § 58.1-467 provides that if an employer fails to withhold tax, but the employee pays the tax on his wages, the employer will be liable only for penalty and interest on the tax that he failed to withhold. As such, the Department can only allow adjustments to reflect Virginia individual return information filed by the Taxpayer's employees.

The Code of Virginia sections 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,

Craig M. Burns

Tax Commissioner

AR/1-4994638772.E