Could Virginia residents keep a credit for Maryland tax on reciprocal wages after Maryland's refund deadline had expired?

Subject

Expired Maryland refund period did not preserve Virginia credit

Plain-English summary

Virginia properly denied the credit for Maryland tax because the Maryland-Virginia reciprocal agreement made the couple's Maryland wages exempt from Maryland income tax. The fact that Maryland's deadline to seek a refund had expired did not create a Virginia credit.

The 2010 Virginia return was due May 2, 2011 because May 1 fell on Sunday. Virginia issued the assessment on April 24, 2014, within the three-year assessment period, so the assessment was timely.

The Department said it had mailed a January 2014 notice directing the taxpayers to contact Maryland, although they said they never received it. Regardless of notice, Virginia law contained no exception allowing the credit merely because the other state's amended-return period had expired.

What this means for you

• Reciprocal wage income generally belongs on the resident-state return, not both states' returns.
• A tax payment to another state does not create a Virginia credit when the other state had no lawful right to tax the income.
• Monitor correction deadlines in both states; one state's expired refund period does not extend the other's credit rules.
• Virginia measured its assessment period from the applicable original or extended filing due date.

Citations and references

• Va. Code §§ 58.1-104, 58.1-341 A, 58.1-344, 58.1-342 B, and 58.1-332 A.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-189

Original ruling text

December 11, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to your clients, * (the "Taxpayers"), for the taxable year ended December 31, 2010.

FACTS

The Taxpayers claimed a credit against their Virginia income tax liability for income earned in Maryland during the 2010 taxable year. Under review, the Department denied the credit on the basis that the reciprocal income tax agreement between Maryland and Virginia exempted the wages from Maryland taxation. As a result, an assessment was issued for additional taxes due.

The Taxpayers filed an appeal, contending that the assessment was issued outside the statute of limitations. The Taxpayers also contend that they did not have sufficient time to amend their Maryland return after learning that the Department had denied the credit.

DETERMINATION

Statute of Limitations

V irginia Code § 58.1-104 generally requires the Department to make an assessment of underpaid tax within three years from the last day prescribed by law for the timely filing of the return. Virginia Code § 58.1-341 A requires that a taxpayer file an individual income tax return by May 1 of the year following the tax year for which the return is filed. Taxpayers are also allowed to elect to take a six month extension to file their returns pursuant to Va. Code § 58.1-344. The last day for the timely filing of a return is the original or extended due date, as applicable. See Public Document (P.D.) 91-116 (7/9/1991) and P.D. 96-191 (8/6/1996).

In this case, the Taxpayers filed their return before the original due date, May 2, 2011 (May 1 was on a Sunday). The Department, therefore, had until May 2, 2014, to make the assessment. The assessment was issued on April 24, 2014; therefore, it was timely.

Reciprocity

Under the provision of Va. Code § 58.1-342 B, Maryland and Virginia have reciprocal agreements which state that neither state will tax the other's residents for compensation earned in the nonresident state under certain conditions. It is only when this agreement does not apply that individuals are eligible for a tax credit.

Virginia Code § 58.1-332 A states that, "Whenever a Virginia resident has become liable to another state for income tax on any earned or business income or any gain on the sale of a capital asset . . . the amount of such tax payable by him shall . . . be credited on the taxpayer's return . . . ." See also P.D. 97-301 (7/7/1997).

In this case, the Taxpayers do not dispute that they were not eligible for the credit. Rather, the Taxpayers contend that the Department failed to notify them in sufficient time so they could amend their Maryland return to recover the taxes erroneously paid prior to the expiration of Maryland's statute of limitations.

The Department's records indicate that the Department mailed a letter to the Taxpayers dated January 23, 2014, to notify them that the Department intended to deny the credit. The letter also instructed the Taxpayers to contact the state of Maryland regarding filing the appropriate amended return. The Taxpayers, however, state that they never received the letter.

Regardless, no exception exists in Virginia law to allow the credit if the other state's statute of limitations for filing an amended return has expired. While I appreciate the Taxpayers' circumstances, I am bound by the clear requirements of the law. Accordingly, the assessment for the 2010 taxable year is upheld.

The Taxpayers will receive an updated bill with accrued interest to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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
T ax Commissioner

AR/1-5752052692.M