Does Maryland wage withholding relieve a Virginia resident commuter from Virginia income tax under the Virginia-Maryland reciprocity agreement?

Plain-English summary

A Virginia resident commuted to work in Maryland during 2016. The employer withheld Maryland income tax, and the taxpayer filed a Maryland nonresident return. He argued that the withholding meant he did not owe Virginia tax.

Virginia disagreed: under the states' reciprocity agreement, commuting wages of a Virginia resident are taxable by Virginia, and mistaken Maryland withholding should be refunded by Maryland.

How reciprocity worked

Va. Code § 58.1-342(B) authorizes reciprocal agreements under which neighboring states exempt nonresident wages when the worker's home state grants the same treatment. Virginia had such agreements with Maryland, West Virginia, and Pennsylvania.

Under the Virginia-Maryland agreement, Virginia residents commuting daily to Maryland generally have wage tax withheld and paid only to Virginia.

This taxpayer was not a Maryland resident, and the Maryland employer income consisted only of wages. He therefore remained required to file and pay Virginia income tax.

Correcting the wrong-state withholding

The proper remedy was not to avoid Virginia tax. The taxpayer should file the appropriate Maryland return to receive a refund of Maryland withholding, while satisfying the Virginia liability.

What this means for you

• Withholding does not determine which state legally taxes the wages. Residency and reciprocity do.
• Tell the employer your resident state. Correct payroll setup avoids funding the wrong jurisdiction.
• Claim the refund from the withholding state. Do not omit the wages from the resident-state return.
• Reciprocity here covered wages. Other income types can follow different sourcing rules.

Common questions

Q: Did paying Maryland withholding satisfy Virginia tax?

A: No. The taxpayer still owed Virginia and had to seek the Maryland money back.

Q: Was the taxpayer required to be a daily commuter?

A: The ruling applies the agreement to a Virginia resident commuting into Maryland and earning wages.

Q: What happened to the Virginia assessment?

A: It was upheld.

Citations and references

• Va. Code § 58.1-342(B) — reciprocal wage agreements
• Reciprocal Income Tax Agreement between Virginia and Maryland (December 7, 2006)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-54

Original ruling text

May 9, 2019

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 “Taxpayer”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayer, a resident of Virginia, worked in Maryland during the 2016 taxable year. The Taxpayer’s employer withheld Maryland income tax, and the Taxpayer filed a Maryland nonresident individual income tax return. The Department received information from the Internal Revenue Service (IRS) that the Taxpayer may have income subject to Virginia income tax. Under audit, the Department issued an assessment for the taxable year at issue. The Taxpayer appeals the assessment, contending his employer withheld Maryland income tax and, therefore, he was not liable for Virginia income tax.

DETERMINATION

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.

In this instance, the Taxpayer filed a nonresident income tax return and reported all of his income to Maryland. Under the Reciprocal Income Tax Agreement between Commonwealth of Virginia and State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only.

If a Virginia resident has Maryland income tax withheld from wages earned while commuting to work in Maryland, the taxpayer should file an income tax return with Maryland in order to receive a refund. Because the Taxpayer was not a resident of Maryland in 2016 and his income from the Maryland employer consisted only of wages, the Taxpayer was required to file and pay Virginia income tax under the reciprocity agreement.

Accordingly, the assessment for the 2016 taxable year is correct. An updated bill will be issued shortly. The Taxpayer should remit payment for the outstanding balance within 30 days of the bill date to avoid any collections actions.

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/1872.A