Could Virginia residents claim an out-of-state tax credit for the District of Columbia Unincorporated Business Franchise Tax?

Subject

Taxpayers claimed a credit for payment of the District of Columbia's Unincorporated Business Franchise Tax

Plain-English summary

Virginia denied the residents' credit for District of Columbia Unincorporated Business Franchise Tax. Virginia's out-of-state credit applied to an income tax similar to Virginia's individual income tax. The UBFT did not qualify because it was labeled a franchise tax and did not tax all of an individual's income.

The Department said Va. Code § 58.1-332.2 specifically excluded taxes of this kind even when they were measured partly by income. It also rejected the argument that the credit had to be allowed to avoid double taxation, explaining that the risk of two jurisdictions taxing the same income did not change the statute's requirements.

The 2013 assessment therefore remained due. The Department said an updated bill would be issued and should be paid within 30 days of the bill date to avoid additional interest.

What this means for you

• A business tax measured by income is not automatically a qualifying income tax for Virginia's resident credit.
• Check the other jurisdiction's tax base and legal classification before claiming the credit.
• The possibility of double taxation does not itself create a Virginia credit when the statutory definition is not met.
• Keep the other jurisdiction's return, tax computation, payment records, and the authority supporting any claimed credit.

Common questions

Q: Why did the D.C. tax fail Virginia's credit test?

A: The ruling treated it as a franchise tax that did not tax all individual income, rather than an income tax similar to Virginia's individual income tax.

Q: Did the double-taxation argument change the outcome?

A: No. The Department said the risk of double taxation did not alter Va. Code § 58.1-332.2.

Q: What happened to the assessment?

A: It remained due and payable, with an updated bill to follow.

Citations and references

• Va. Code §§ 58.1-332(A) and 58.1-332.2(A)-(B).
• Guaranty Trust Co. of New York v. Commonwealth of Virginia, 305 U.S. 19 (1938).
• P.D. 11-92, P.D. 12-108, and 2012 Senate Bill 681 (Chapter 292).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-89

Original ruling text

April 28, 2015

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 "Taxpayers") for the taxable year ended December 31, 2013.

FACTS

On their Virginia resident income tax return for the 2013 taxable year, the Taxpayers claimed a credit for payment of the District of Columbia's Unincorporated Business Franchise Tax (UBFT). Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appealed, contending that the credit should have been allowed because the UBFT qualifies as an income tax paid to another state and the credit was necessary to avoid double taxation.

DETERMINATION

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. The Department has ruled that the UBFT does not qualify for the credit. See P.D. 11-92 (6/2/2011). In addition, in 2012, the General Assembly enacted Senate Bill 681 (Chapter 292, 2012 Acts of Assembly ), effective for taxable years beginning on or after January 1, 2007, to clarify and restore the Department's longstanding policy of allowing a credit only for income taxes that are similar to Virginia's individual income tax. See P.D. 12-108 (7/1/2012). This Act was codified at Va. Code § 58.1-332.2.

Virginia Code § 58.1-332.2 A defines an "income tax" as a term of art that refers to a specific type of tax levied on all of a resident's earned and unearned income, and all income of a nonresident from sources within the jurisdiction, which is similar to the income tax that Virginia imposes on resident and nonresident individuals. Virginia Code § 58.1-332.2 B includes examples of taxes that do not qualify for the credit, even though they may be measured, in part, by income. Taxes do not qualify because (i) they are labeled as a franchise or license tax, and (ii) they do not tax all income of the individual. Examples of taxes that do not qualify for the credit pursuant to Va. Code § 58.1-332.2 include the UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108.

In addition, the risk of double taxation does not affect the application of Va. Code § 58.1-332.2. Courts have long recognized that the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event. It is also a long established principle that the risk of double taxation does not violate a taxpayer's constitutional rights. In Guaranty Trust Co. of New York v. Commonwealth of Virginia , 305 U.S. 19 (1938), the United States Supreme Court held that the imposition of an income tax under Virginia laws on income received as beneficiary of a trust established in New York did not violate the Due Process Clause of the Constitution, notwithstanding that the trust was also subject to tax in New York. Nor did such treatment deny equal protection under the United States Constitution.

Pursuant to Va. Code § 58.1-332.2 and in accordance with the Department's longstanding policy, the UBFT does not qualify for the credit under Va. Code § 58.1-332. Accordingly, the assessment is correct and remains due and payable. An updated bill will be issued shortly to the Taxpayers. The outstanding balance 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
Tax Commissioner

AR/1-5952436069.M