Could Virginia base a withholding assessment solely on another agency's worker-classification information?

Plain-English summary

Virginia held that the Department could obtain worker-classification information from the Virginia Employment Commission under Va. Code § 58.1-3 C; expiration of an earlier executive order did not end the statutory information-sharing authority.

But the VEC information could not substitute for Virginia Tax's own analysis. The auditor had not independently examined the company's records under the employee-versus-independent-contractor factors. The determination therefore returned the case for a complete review, with the taxpayer required to document its claim that the workers were subcontractors.

The ruling also explained that Virginia may begin collection after its ordinary 30-day grace period even though the appeal deadline is 90 days. A filed appeal or notice of intent to appeal can stay collection, subject to the jeopardy exception. Collection was withheld here until audit revisions were complete.

Common questions

Was the interagency information exchange unlawful? No. Virginia Code independently authorized it.

Did the ruling cancel the withholding assessment? Not immediately. It required a full worker-classification examination and adjustment as warranted.

Citations and references

• Va. Code §§ 58.1-3 C, 58.1-460, 58.1-467, 58.1-1821, and 58.1-205
• 23 VAC 10-140-10
• Treas. Reg. § 31.3121(d)-1
• P.D. 96-280

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-107

Original ruling text

June 6, 2018

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will respond to your letter in which you seek correction of the withholding tax assessment issued to * (the “Taxpayer”) for the taxable periods January 2013 through December 2013. I apologize for the delay in responding to your appeal.

FACTS

Under audit, the Taxpayer, a corporation, was assessed tax, penalties, and interest for failure to withhold taxes from employee wages during the taxable periods at issue. The Taxpayer filed an appeal, contending its workers were not employees and information was inappropriately obtained from the Virginia Employment Commission (VEC) pursuant to an expired executive order relating to the exchange of information between state agencies. The Taxpayer also complains the Department engaged in collection actions prior to the time for filing an appeal had expired.

DETERMINATiON

Exchange of Information

Virginia Code § 58.1-3 C grants the Department authority to exchange necessary information to facilitate the collection of wages, unemployment taxes, overpaid benefits, and the collection of taxes and fees with the following regulatory agencies: Virginia Employment Commission, the Department of Labor and Industry, the Department of Professional Occupation, and the State Corporation Commission's Bureau of Insurance. Because the Code of Virginia grants the exchange of information between the designated regulatory agencies, the expiration of any executive orders relating to the exchange of information has no bearing on the Department's authority to continue such exchange.

Employee vs. Independent Contractor

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....” The Code of Virginia does not define “independent contractor” for income tax withholding purposes. Under Title 23 of the Virginia Administrative Code (VAC) 10-140-10 the relationship between an employer and employee or independent contractor is determined in accordance with the test set forth in Treas. Reg. § 31.3401(c)-1. In Public Document (P.D.) 96-280 (10/10/1996), the Tax Commissioner found that the factors enumerated in Treas. Reg. § 31.3121(d)-1 should be used as a guideline for determining whether a worker is an employee or an independent contractor.

In accordance with Virginia Code § 58.1-3 C, the Department received information that concerning the Taxpayer's employee classification from the VEC. The Department requested a list of the workers and allowed adjustments to reflect Virginia individual income tax return information filed by the Taxpayer's workers as provided under Virginia Code § 58.1-467. The Department's auditor, however, made no independent analysis as to whether the workers were employees or independent contractors.

The Taxpayer asserts subcontractors were hired to perform services on contracts. According to the Taxpayer, the subcontractors provided their own transportation, tools and materials based on scope of work for which they have been hired. In some cases, the Taxpayer rented specialty equipment that was provided to the subcontractors. However, the Taxpayer claims it was reimbursed out of charges owed to the subcontractors.

Collection Actions

The Taxpayer asserts the Department issued a tax lien for the 2013 assessment after he stated his intent to appeal. Virginia Code § 58.1-1821 provides taxpayers the right to appeal tax assessments issued by the Department, within 90 days of such assessments, if they believe the assessments are incorrect. Once an appeal has been filed, the Department is prohibited from collecting the tax until a final determination is issued, unless collection of the assessment is in jeopardy. This subsection however, does not prohibit collections of an assessment until an appeal or notice of intent to appeal is on file.

Generally, the Department will allow a taxpayer 30 days to pay an assessment before pursing collection actions as a means of satisfying a taxpayer's liability. While a taxpayer has 90 days to file an appeal, the Department may commence collection actions, including liens, after the 30-day grace period. Even if a taxpayer is unable to file an appeal within the 30-day grace period, Virginia Code § 58.1-1821 permits a taxpayer to file a notice of intent to appeal that will stay the Department from collecting the tax, with an exception for assessments for which collection is in jeopardy, until the 90-day period has expired or a complete appeal is filed, whichever comes first.

CONCLUSION

The assessment was based on information obtained from VEC as authorized under Virginia Code § 58.1-3 C. While such information is helpful in identifying possible issues with withholding tax compliance, the Department's regulations require an evaluation an employer's records to determine if its workers are employees or independent contractors pursuant to the factors enumerated in Treas. Reg. § 31.3121(d)-1. Accordingly, the audit will be returned to audit staff in order to conduct a complete examination of the Taxpayer's records as required under Title 23 VAC 10- 140-10.

Under the provisions of Virginia Code § 58.1-205, an assessment of a tax by the Department is deemed prima facie correct. As such, the burden of proof is on the Taxpayer to show the Department's assessment is incorrect. Accordingly, the Taxpayer must provide sufficient documentation to support its contention that its workers were actually subcontractors for the taxable periods at issue. The Taxpayer will need to provide documentation as requested by the audit staff. Once the examination of the Taxpayer's documentation is completed, the assessment will be adjusted as warranted. All collection actions will be withheld until the audit revisions are complete and a revised assessment, if any, is issued.

The Code of Virginia sections, regulations and public document 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/877.o