Did a Maryland nonprofit owe Virginia withholding even without a Virginia office or property?

Subject

An employee who resided in Virginia, while performing services outside of Virginia, must have tax withheld regardless of where the employee works.

Plain-English summary

A Maryland nonprofit with no Virginia office or property had maintained a Virginia withholding account since 2002. It filed a March 2015 quarterly report without payment, and Virginia assessed the reported tax.

Virginia explained that employers generally withhold for Virginia residents even when those employees work outside Virginia. Under reciprocity, a Virginia resident whose only Maryland-source income is wages is taxed by Virginia, and the Maryland employer withholds Virginia tax.

An employee can instead furnish Form VA-4 certifying no prior-year and expected current-year Virginia liability. The employer need not independently test the employee's claimed exemptions.

The Department's records showed two withholding returns for the same quarter, so the assessment arose from information submitted by the nonprofit or its payroll service. Virginia upheld the paid assessment but advised the employer to determine whether both returns were necessary.

Citations and references

• Va. Code §§ 58.1-460, 58.1-461, and 58.1-342 B.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-57

Original ruling text

April 11, 2016

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter in which you correction of the withholding tax assessment issued to * (the "Taxpayer") for the quarter ended March 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a nonprofit organization located in Maryland. The Taxpayer opened a Virginia withholding tax account in 2002 and made regular quarterly withholding payments to the Department. The Taxpayer electronically filed a quarterly report for period ended March 2015 but remitted no withholding tax. The Department issued an assessment for the unpaid tax. The Taxpayer appealed the assessment, contending it is a nonprofit organization and has no place of business and no property in Virginia.

DETERMINATION

Withholding Tax

Virginia Code § 58.1-461 provides that employers must withhold taxes on wages of employees. Virginia Code § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages, or a resident of the Commonwealth who performs or performed any service ... outside the Commonwealth for wages." As such, an employee who resided in Virginia, while performing services outside of Virginia, must have tax withheld regardless of where the employee works. Usually, a resident of Virginia is subject to Virginia income tax on all of his or her wages.

The Taxpayer asserts it has no place of business in Virginia. However, the Taxpayer provides no information as to whether or not it employs residents of Virginia. In fact, the Taxpayer has filed returns and paid Virginia withholding tax since 2002.

Under Va. Code § 58.1-461, however, an employer is not required to withhold any Virginia income tax if the employee provides a signed Employee's Virginia Income Tax Withholding Exemption Certificate (Form VA-4) that certifies that the employee incurred no Virginia income tax liability for the prior taxable year and will incur no Virginia income tax liability for the current taxable year. An employer is not required to determine whether the employee has claimed the correct number of exemptions.

Reciprocity

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.

Conversely, when an employee is a domiciliary or legal resident of Virginia and whose only Maryland source income is from salaries and wages, such salaries and wages are subject to income tax by Virginia. Under such circumstances, Maryland employers are required to withhold Virginia income tax from their employees to live in Virginia and commute to Maryland to work.

Review of the Department's records show the Taxpayer filed two withholding returns for the quarter ended March 2015. Thus, the assessment is based on information submitted by the Taxpayer or the Taxpayer's payroll service. As such, there is no basis for granting relief. Accordingly, the assessment, which has been paid in full, is upheld. The Taxpayer, however, should review its withholding records to determine if both returns were required for the quarter ended March 2015.

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/1-6064782749.D