Could a Virginia resident claim a credit for Maryland withholding on wages protected by reciprocity, and could Virginia waive the resulting penalty and interest?

Plain-English summary

The Virginia resident could not convert erroneous Maryland withholding into a Virginia credit. Virginia and Maryland had a reciprocal agreement under which each state generally did not tax the other state's residents on qualifying compensation earned in the nonresident state. Because the wages were not subject to Maryland income tax, the taxpayer was not liable for Maryland tax and did not meet Virginia's requirement for a credit based on tax payable to another state.

The ruling said the taxpayer should amend the Maryland return and seek a refund if Maryland's limitation period still allowed it.

The taxpayer also said Virginia personnel had advised him by telephone to file Maryland nonresident returns and claim a Virginia credit. Virginia's statutory abatement rule covered erroneous advice furnished in writing by a Department employee. The telephone conversation did not meet that requirement, and the advice may have been reasonable because a Maryland return was likely needed to recover the withholding.

Virginia upheld the tax and interest. It waived the estimated-tax underpayment penalty for reasonable cause because the employer should have known about reciprocity and withheld Virginia tax instead. Interest remained mandatory compensation for the use of money due to Virginia.

Common questions

Q: Does tax withheld by another state automatically qualify for Virginia's other-state credit?
A: No. The taxpayer must actually be liable for the other state's income tax on qualifying income.

Q: Did Virginia waive the underpayment penalty?
A: Yes. The employer should have withheld Virginia tax, which supplied reasonable cause on these facts.

Q: Did Virginia waive interest or the tax assessment?
A: No. The tax and mandatory interest were upheld.

Citations and references

• Va. Code §§ 58.1-342(B) and 58.1-332(A).
• Va. Code §§ 58.1-1835, 58.1-105, 58.1-492, and 58.1-1812.
• Virginia Public Documents 97-301 (July 7, 1997) and 05-60 (April 14, 2005).

Subject

Taxpayer's income is not subject to Maryland's income tax, and not eligible for a tax credit

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-169

Original ruling text

October 26, 2012

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, 2008.

FACTS

During 2008, the Taxpayer, a Virginia resident, worked temporarily for his employer in Maryland. The employer withheld Maryland income tax for the period of time the Taxpayer worked in Maryland. In April 2010, the Taxpayer filed an amended 2008 Virginia income tax return as a resident claiming a credit for Maryland taxes withheld by his employer. The Department issued a refund based on the Taxpayer's claim.

Under review, the Department adjusted the credit to reflect the actual amount of tax paid on the Maryland return and issued an assessment. The Taxpayer appeals the assessment, contending the Department failed to provide timely assistance to his request for information about his filing requirements for 2008. The Taxpayer also requests that the Department waive the penalty and interest.

DETERMINATION

Income Tax Assessment

Under the provision of Va. Code § 58.1-342 B, Maryland and Virginia have reciprocal agreements which state that neither state will tax the other's residents for compensation earned in the nonresident state under certain conditions. It is only when this agreement does not apply that individuals are eligible for a tax credit.

Virginia Code § 58.1-332 A states that, "Whenever a Virginia resident has become liable to another state for income tax on any earned or business income or any gain on the sale of a capital asset ...the amount of such tax payable by him shall ...be credited on the taxpayer's return ...." See also Public Document (P.D.) 97-301 (7/7/1997).

In this instance, the Taxpayer contends his employer erroneously submitted his income tax withholdings to Maryland. A review of the Taxpayer's Maryland income tax return shows the Taxpayer reported a portion of his wages to Maryland and received a refund for the overpayment of tax. Because the Taxpayer's income is not subject to Maryland's income tax, he is not liable to pay Maryland's income tax and not eligible for a tax credit under the provisions of Va. Code § 58.1-332. See P.D. 05-60 (4/14/2005). If Maryland's statute of limitations permit, the Taxpayer will need to amend his Maryland income tax return and request a refund of any income tax paid for the 2008 taxable year.

Written Advice

The Taxpayer asserts that the Department instructed him via telephone to file nonresident returns with Maryland and claim a tax credit on the Virginia income tax return. This could very well have been appropriate advice given the facts about the Taxpayer's situation. Because the employer withheld Maryland income tax, the Taxpayer likely needed to file a nonresident return in order to receive a refund. In addition, as indicated above, Virginia does generally allow an out-of-state tax credit to Virginia residents.

Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity. In this case, the Department provided advice by telephone, not in writing. Furthermore, the advice may have been appropriate based on the facts presented during that phone conversation. As such, the Tax Commissioner is not required to abate the assessment based on erroneous telephonic advice. Accordingly, the assessment of tax is upheld.

Penalty and Interest

The Taxpayer requests that the penalty and interest be abated on the basis that his circumstances are unusual and his contention that the Department did not respond to his request for advice in a timely manner. In addition, the Taxpayer requests that all collection activity be suspended due to his current unemployment status.

Virginia Code § 58.1-105 grants the Tax Commissioner the authority to accept an offer in compromise and to settle claims of disputed or doubtful liability, or doubtful collectibility and to waive penalty for reasonable cause. A review of the documentation indicates doubtful liability does not exist in this case.

The Taxpayer requests abatement of penalty. Virginia Code § 58.1-492 provides for an "addition to tax" (commonly called the "underpayment penalty") in the event of an underpayment of estimated tax. Taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Because the Taxpayer's employer withheld Maryland income tax and the Taxpayer failed to make four estimated tax payments throughout the taxable year, the Department assessed the underpayment penalty.

Under the circumstances, the employer should have known about the reciprocal agreement between Maryland and Virginia and withheld Virginia income tax from the Taxpayer's salary. Accordingly, I find reasonable cause to waive the underpayment penalty for the 2008 taxable year.

With regard to the Taxpayer's request to waive interest, Va. Code § 58.1-1812 mandates the application of interest to any assessment of tax. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money that was properly due the Commonwealth. Accordingly, I find no basis to waive the assessed interest.

CONCLUSION

Based on the facts in this case, the assessment of tax and interest is upheld. The addition to tax assessed pursuant to Va. Code § 58.1-492 will be abated.

If the Taxpayer wishes to pursue an offer in compromise for doubtful collectibility as a result of his current financial circumstances, he may submit an Offer in Compromise - Individual Request for Settlement, accompanied with a Financial Information Statement. The completed forms should be sent to: Offer in Compromise Team, Collections Section, Virginia Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880. You may also contact a member of this team at (804) 367-8045. Upon completion of that review, a response will be issued to the Taxpayer.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5139634204.D