Did buying and using another state's transferable tax credit count as tax actually paid for Virginia's other-state credit?

Plain-English summary

Virginia refused to treat a purchased State A tax credit as tax actually paid to that state. The Virginia other-state credit was meant to relieve double taxation and was limited to the lesser of actual other-state tax paid or Virginia tax imposed on the same qualifying income.

The Department treated a tax credit as a reduction of liability, whether earned through activity or bought from another taxpayer. Even if the credit qualified as property, its use remained limited to State A's liability and did not become a payment that could offset Virginia tax.

Common questions

Q: Does purchasing a transferable credit turn it into tax paid?
A: No. Virginia still treated it as a liability reduction.

Q: Did Virginia reconsider its earlier policy?
A: It considered the argument, upheld the adjustment, and called this its final determination.

Citations and references

• Va. Code § 58.1-332(A).
• Huffmans v. Walker, 26 Gratt. 314, 67 Va. 314 (1875); Carnegie Trust Co. v. Security Life Insurance Co. of America, 111 Va. 1, 68 S.E. 412 (1910).
• Virginia Public Documents 96-8 and 11-50.

Subject

Income tax liability when they pay income tax to another state

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-7

Original ruling text

February 23, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter seeking reconsideration of the Department's determination letter, issued as Public Document (P.D.) 11-50 (04/04/11), to * (the "Taxpayers") for the taxable year ended December 31, 2007.

FACTS

In P. D. 11-50 the Tax Commissioner upheld the Department's adjustment of the Virginia credit for income tax paid to another state. The Taxpayer requests a redetermination, contending the tax credit earned in * (State A) was purchased by the Taxpayer and should be considered as property that may be used as a form of payment for Virginia income tax.

DETERMINATION

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of principal residence. The intent of the credit is to grant Virginia residents relief in situations where they are taxed by both Virginia and another state on these types of income. As a general rule, the resident is entitled to a credit for income tax paid to another state which is limited to the lesser of: (1) the amount of tax actually paid to the other state; (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state.

In P.D. 11-50, the Department reiterated its longstanding policy that a tax credit is considered a reduction of liability and not an actual payment of tax, regardless of the rules for application of such credit. As such, whether a taxpayer earned a credit through a required activity, or purchased a credit from another taxpayer, the Department does not consider tax credits to be an actual tax payment under Va. Code § 58.1-332.

The Taxpayers assert that the State A tax credit is property under Virginia law and that, as property, may be used as a payment of debt pursuant to the Court's decision in Huffmans v. Walker , 26 Gratt. 314, 67 Va. 314 (1875). Therefore, they believe that the Department misapplied the policy on which P.D. 11-50 is based.

In general, there are three elements in the right of property. These elements include the legal title to the property, the beneficial interest in it, and the right of control over it. The Virginia Supreme Court (the "Court"), in Carnegie Trust Co. et al. v. Security Life Insurance Co. of America , 111 Va. 1, 68 S. E. 412 (1910), has confirmed Virginia's adherence to these elements.

The Court has also stated that Virginia has the right to exercise jurisdiction over all property within its boundaries. See W. H. Johnson et al. v. J. L. Merrit et al. , 125 Va. 162, 99 S.E. 785 (1919). Specifically, the Court in this case granted that Virginia "may determine the extent of title to property within is limits, and the methods of transferring such title."

It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized."

Further, by reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

Within the context of the out-of-state tax credit, the Department has consistently held that an "actual payment" to another state does not include a tax credit against the tax of such other state. See P. D. 96-8 (3/04/1996). P. D. 11-50 reiterates the Department's longstanding policy.

Even when a tax credit is considered to be property, the control of such property is ultimately limited to the reduction of a liability imposed by a taxing authority against which such tax credit is available. As such, a tax credit earned against State A income tax cannot be used to offset Virginia income tax. Thus, the Department does not look at a tax credit that has been transferred as gaining additional rights of property merely by being transferred from the taxpayer that earned the credit to a purchaser of such credit.

While I recognize the Taxpayers' continuing disagreement with the Department's position, I find that the policy is valid and applicable in this case. Therefore, the Department's adjustment is upheld. This is the Department's final determination on this matter.

The Code of Virginia sections and public documents cited 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 * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4793524347.D