My employer's office is in Virginia, but I worked remotely from my home state and my employer withheld Virginia tax anyway -- am I entitled to a full refund even though I also excluded that income on my home state's return?

Plain-English summary

A resident of another state (State A) received a temporary work assignment from his employer, a federal government agency with offices in Virginia -- but he performed all of the work remotely from his State A home. His employer nonetheless withheld Virginia income tax on his wages. He filed Virginia's Special Nonresident Claim for Individual Income Tax Withheld (Form 763-S) seeking a refund, and the Department initially granted it.

The clawback. Under review, the Department asked for a copy of the taxpayer's State A return and discovered he had subtracted the Virginia-attributed income when computing his State A taxable income. Reasoning that the income therefore wasn't taxed by anyone, the Department disallowed the refund and issued an assessment to recover it. The taxpayer appealed, arguing he never resided or worked in Virginia.

Where the work happens is what counts, not where the employer's office is. Virginia only taxes nonresidents on Virginia-SOURCE income -- income attributable to owning property or conducting a business, trade, profession, or occupation IN Virginia (Va. Code §§ 58.1-325, 58.1-302), and Virginia's regulations specifically define Virginia-source wages as those "earned in Virginia." Even though the office that assigned the taxpayer's temporary work was located in Virginia, the taxpayer physically completed all of the work in State A. So the wages were never Virginia-source income in the first place, and Virginia tax should never have been withheld at all.

Another state's return isn't a valid basis to deny a Virginia refund. The Department's original reason for clawing back the refund -- that the taxpayer had subtracted the income on his State A return -- didn't hold up. The Department cannot rely SOLELY on how a taxpayer reported income on another state's return as the basis for adjusting what's reported on a Virginia return. A taxpayer might have correctly (or incorrectly) reported income under a DIFFERENT state's own laws and filing rules; if he made a mistake on his State A return, the fix is an amended State A return, not a Virginia assessment. Virginia's taxing authority is limited to its own jurisdiction, and the mere fact that income isn't taxed somewhere else doesn't give Virginia the power to claim it. Instead, Virginia must independently determine whether income is attributable to Virginia based on actual residency or Virginia-source-income facts.

Result. Because the wages were never Virginia-source income, Virginia tax was erroneously withheld in the first place, and the assessment recovering the refund was abated.

What this means for you

Remote workers whose employer is based in Virginia but who perform the work elsewhere

What matters for Virginia nonresident taxation is WHERE you physically perform the work, not where your employer's office happens to be located. If you never actually worked in Virginia, your wages generally aren't Virginia-source income, even if Virginia tax was withheld.

Anyone whose Virginia refund was clawed back based on how they reported income to another state

The Department cannot rely solely on your OTHER state's return as the basis for readjusting your Virginia liability -- it must independently determine Virginia tax based on actual residency or Virginia-source-income facts. If the issue is really about your other state's return, that's a matter to fix with that state, not a basis for a Virginia assessment.

Employers withholding Virginia tax on remote or temporarily-assigned employees

Confirm where the work is actually being performed before withholding Virginia income tax -- withholding based on the location of the assigning office, rather than where the work is physically done, can trigger an erroneous withholding and refund cycle like the one in this ruling.

Common questions

Q: My employer's office that assigned my work is in Virginia, but I worked remotely from my own state -- is my income Virginia-source income?
A: No. Virginia-source wages are wages actually EARNED in Virginia (i.e., where the work is physically performed), not wages tied to the location of the employer's office that made the assignment.

Q: The Department clawed back my Virginia refund because I excluded the same income on my home state's return -- is that a valid reason?
A: Not by itself. The Department cannot rely solely on how you reported income on another state's return to adjust your Virginia return; it must make its own independent determination of your Virginia tax liability based on residency or Virginia-source-income facts.

Q: If I made a mistake reporting income to my home state, does that affect my Virginia taxes?
A: Generally no -- if you underreported to your home state, the fix is filing an amended return there. Virginia's determination of your Virginia liability is a separate question from how you handled your home state's return.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-325 -- nonresidents are taxed only on Virginia-source income
• Va. Code § 58.1-302 -- Virginia-source income limited to property ownership or business/trade/occupation conducted in Virginia
• 23 VAC 10-110-180 B -- Virginia-source income includes salary, tips, or wages earned in Virginia

Prior rulings the Department relied on (described here, not linked): P.D. 23-107 (10/5/2023) -- a taxpayer's position on another state's return isn't a sufficient basis, standing alone, to determine Virginia tax liability; the Department must attribute income based on actual evidence of residency or Virginia-source income. This ruling is a companion to this corpus's P.D. 24-61, decided the same day and applying the same 23-107 doctrine in a military-servicemember residency context.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-62

Original ruling text

June 5, 2024

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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, 2022.

FACTS

The Taxpayer was a resident of * (State A) during the 2022 taxable year. He received a temporary work assignment from his employer, a federal government agency with offices in Virginia. The Taxpayer worked on this assignment remotely from his State A residence. The employer withheld Virginia income tax. The Taxpayer filed a Virginia Special Nonresident Claim for Individual Income Tax Withheld (Form 763-S), requesting a refund of the tax that was withheld. The Department issued the refund based on this filing.

Under review, the Department requested that the Taxpayer provide a copy of his 2022 State A return. The Department subsequently disallowed the refund because the Taxpayer had subtracted the income attributed to his work in Virginia on the State A return. Accordingly, the Department issued an assessment to recover the refund. The Taxpayer appealed, contending that he was entitled to the refund because he did not reside or work in Virginia.

DETERMINATION

Under Virginia Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession, or occupation in Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-110-180 B provides that “net income…from Virginia sources includes salary, tips or wages earned in Virginia ...” [Emphasis Added.]

In this case, although the office that gave the temporary assignment to the Taxpayer was in Virginia, he completed the work in State A. The wages from the assignment, therefore, were not earned in Virginia. Accordingly, the Taxpayer did not have Virginia source income during the 2022 taxable year and Virginia income tax should not have been withheld.

The Department disallowed the refund because the Taxpayer subtracted the income for purposes of computing his State A taxable income on his State A return. The Department, however, cannot rely solely on another state’s return as the basis for adjusting the income reported on taxpayers’ Virginia income tax returns. An individual may have correctly reported their income on the other state’s return based on its laws and filing requirements. In this case, the Taxpayer bears the responsibility of reporting his income properly to State A and, if he failed to do so, he should file an amended return with State A.

Virginia can only tax income within its limited jurisdiction. The fact that income is not reported to another state does not grant the Department authority to assign that income to Virginia. Instead, the Department must seek to attribute income based on factual evidence of residency or income from Virginia sources. See Public Document (P.D.) 23-107 (10/5/2023).

Accordingly, Virginia income tax was erroneously withheld by the Taxpayer’s Virginia employer for the 2022 taxable year. As such, the assessment will be abated.

The Code of Virginia sections 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 (804) ***.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4749.B

Related Documents

23-107