Did an out-of-state employer owe Virginia withholding for employees working in Virginia, and could a self-created document pay the assessment?

Plain-English summary

Virginia upheld the withholding assessments because the out-of-state proprietor had employees performing services in Virginia and filed no returns. Virginia's employer and employee definitions expressly covered nonresidents when the work occurred in the Commonwealth.

The proprietor refused to provide records for an authorized examination. Virginia therefore used available information to estimate withholding liability.

He then submitted a private document and called it statutory legal tender. Federal law recognized U.S. coins and currency, including Federal Reserve notes, as legal tender; his statement was neither and could not satisfy the tax debt.

The assessments remained payable. Virginia also stated that intentional failure to withhold based solely on trivial claims authorized a 100% fraud penalty.

What this means for you

• Out-of-state employers can have Virginia withholding duties for in-state work.
• File returns and provide payroll records when requested.
• Private notes or declarations are not tax payment.
• Intentional noncompliance can trigger severe fraud penalties.

Citations and references

• Va. Code §§ 58.1-111, 58.1-219, 58.1-308, 58.1-460, and 58.1-461.
• 12 U.S.C. § 411.
• 31 U.S.C. § 5103.

Subject

Employee withholding returns were not filed

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-123

Original ruling text

July 1, 2011

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter concerning the Virginia withholding tax assessments issued to * (the "Taxpayer") for the taxable periods January 2007 through September 2010.

FACTS

The Taxpayer is a sole proprietor located in * (State A). During the periods at issue, its employees came into Virginia and performed services on behalf of the Taxpayer. The Taxpayer did not file employer withholding income tax returns for the

periods at issue.

The Department contacted the Taxpayer to schedule an examination of its withholding records. The Taxpayer refused to make its records available, asserting that it was not subject to Virginia law. As a result, the Department issued assessments based on the information available. The Taxpayer filed a statement in which it claims to be submitting statutory legal tender of the United States and requests the Department to accept this statement as payment of the assessments.

DETERMINATION

Virginia Code § 58.1-461 requires employers to withhold taxes from employee wages for each payroll period. Virginia Code § 58.1-460 defines "employer" as "the person, whether a resident or nonresident of the Commonwealth, for whom an individual performs or performed any service as an employee ...." (Emphasis added.) Further, this section 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 ...." (Emphasis added.)

In this case, the Department obtained evidence that employees were performing services in Virginia on behalf of the Taxpayer. Because no withholding returns were filed, the Department contacted the Taxpayer to schedule an audit as authorized under Va. Code § 58.1-219. When the Taxpayer failed to file valid returns or provide records, the Department issued estimated assessments pursuant to Va. Code § 58.1-111.

The Taxpayer does not dispute the assessments, but has submitted a document claiming to be legal tender for the satisfaction of the assessments at issue. Under 12 USC § 411, Federal Reserve notes are the measure of value in the monetary system of the United States. Additionally, 31 USC § 5103 provides, in pertinent part:

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.

The Taxpayer's statement is not currency of the United States as defined by federal law, and therefore cannot be accepted as payment of the assessments at issue. Accordingly, the assessments remain outstanding and payable. Updated assessments, with accrued interest, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessments are paid within 30 days from the date of the revised bills.

Further, the Taxpayer's claim that it is not required to withhold and remit income tax from his employees has no basis in fact or Virginia law. Because the Taxpayer has intentionally failed to properly withhold income tax from its employees based solely on trivial claims, the Department is authorized to assess the 100% fraud penalty on each of the assessments as prescribed by Va. Code § 58.1-308.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4647959362.E