Can a Virginia resident who works remotely from Virginia for an out-of-state employer claim a credit for tax paid to the employer's state?

Plain-English summary

A married couple moved to Virginia in September 2018. The wife worked remotely from her Virginia home for an employer based in another state ("State A"). They filed a part-year Virginia return and a State A return, reported her wages to State A, and claimed a Virginia credit for the tax paid to State A. The Department denied the credit and assessed; the couple appealed.

Why the credit was denied. Va. Code Sec. 58.1-332 A gives a Virginia resident a credit for income tax paid to another state, but only for income derived from sources outside Virginia. The catch: income from working remotely from Virginia is treated as income from a business, trade, profession, or occupation carried on in Virginia, so it is Virginia source income -- regardless of where the employer is located (Va. Code Sec. 58.1-302; P.D. 17-50). A resident cannot claim the out-of-state credit on Virginia source income. (Even where the credit applies, it is capped at the lesser of the tax actually paid to the other state or the Virginia tax on that income -- P.D. 97-301.)

The fix is with the other state. Because the income was Virginia source, State A may not have had the right to tax it. The Commissioner told the couple to check State A's law and, if the income was not taxable there, file a refund claim with State A -- or claim a credit on the State A return for the Virginia tax.

What this means for you

Remote work from Virginia is Virginia source income

If you live in Virginia and work from here, your wages are Virginia source income even if your employer is in another state. Virginia will not credit another state's tax on that income.

Look to the other state for relief

When another state taxes income that is really Virginia source, your remedy is usually a refund claim against that state -- not a Virginia credit.

Remember the credit cap even when it applies

The out-of-state credit is limited to the lesser of the tax you actually paid the other state or the Virginia tax on that same income (P.D. 97-301).

Common questions

My employer is in another state -- doesn't that make the income taxable there? Where you perform the work controls for Virginia purposes. Working from Virginia makes the income Virginia source, so Virginia taxes it and gives no credit for the other state's tax.

How do I avoid double taxation? Check the other state's rules. If it should not have taxed Virginia-source remote-work income, seek a refund or credit from that state.

Citations and references

• Va. Code Sec. 58.1-332 A -- credit for tax paid to another state applies only to income from sources outside Virginia; capped at the lesser of tax paid or Virginia tax on the income (P.D. 97-301).
• Va. Code Sec. 58.1-302 / P.D. 17-50 -- remote work performed from Virginia is a business/occupation carried on in Virginia, i.e., Virginia source income.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-71

Original ruling text

April 28, 2020

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, 2018.

FACTS

The Taxpayers, a husband and wife, moved to Virginia in September 2018. The wife was employed by a company based in * (“State A”) but worked remotely from her residence in Virginia. The Taxpayers filed a part-year Virginia resident income tax return and a State A nonresident/part-year resident income tax return for the 2018 taxable year. On their Virginia return, the Taxpayers claimed a credit for income tax paid to State A. The Department denied the credit and issued an assessment. The Taxpayers appealed, contending they were permitted to claim a credit for income tax paid to State A because the wife’s employer was based there.

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. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or in the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). The credit is also subject to the further limitation that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax. See Virginia Code § 58.1-332 A. Thus, a Virginia resident taxpayer may not claim credit on their Virginia income tax return for income tax paid to another state on Virginia source income.

Based on the information provided, it appears that the wife worked remotely from Virginia for an employer based in State A. She reported income attributable to such activities as State A taxable income on her State A nonresident income tax return and claimed credit for tax paid on such income against her Virginia income tax liability. Working remotely from Virginia, regardless of where the employer is based, however, would be considered a business, trade, profession or occupation carried on in Virginia, and, as such, any income from such activities would be considered Virginia source income. See Virginia Code § 58.1-302 and P.D 17-50 (4/6/2017). As Virginia source income, any tax paid to another state on it would not be eligible for the credit under Virginia Code § 58.1-332.

The assessment, therefore, is upheld. The Taxpayers should review State A’s tax laws to determine what extent that income was subject to tax in State A, and if so, whether they may be entitled to claim a credit on their State A return for income tax paid to Virginia. If such income was not taxable by State A, the Taxpayers should file an appropriate refund claim with State A.

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/2193.A

Related Documents

97-301

17-50