Could Virginia residents claim an out-of-state tax credit for District of Columbia Unincorporated Business Franchise Tax paid on sole-proprietor income?

Subject

UBFT does not qualify for the credit under Va. Code § 58.1-332.

Plain-English summary

A married Virginia couple claimed a resident income-tax credit for District of Columbia Unincorporated Business Franchise Tax paid on the husband's income as a sole proprietor. Virginia disallowed the credit and upheld the assessment.

Virginia's credit applies only to a qualifying income tax paid to another state. Section 58.1-332.2 defines that term as a tax similar to Virginia's individual income tax, imposed broadly on a resident's earned and unearned income and a nonresident's income from the jurisdiction. It expressly excludes taxes that are franchise or license taxes or do not reach all individual income.

The D.C. UBFT therefore did not qualify, even though it was measured by the husband's business income. Virginia said the tax's character, not the fact that a sole proprietor paid it, controlled the result.

The assessment remained payable, with an updated bill to follow; the ruling advised payment within 30 days of the bill date to avoid more interest.

Common questions

Does every tax measured by business income qualify for Virginia's resident credit? No. The other tax must be similar to Virginia's individual income tax; a franchise tax can be excluded even if income helps measure it.

Did sole-proprietor status change the result? No. Virginia expressly held that paying the UBFT on sole-proprietor income did not make it a qualifying income tax.

Citations and references

• Va. Code §§ 58.1-332 A and 58.1-332.2.
• 2012 Va. Acts ch. 292; P.D. 11-92 and P.D. 12-108.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-23

Original ruling text

March 8, 2016

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, 2012. I apologize for the delay in responding to your appeal.

FACTS

On their Virginia resident income tax return for the 2012 taxable year, the Taxpayers claimed a credit for payment of the District of Columbia's Unincorporated Business Franchise Tax (UBFT). Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appeal, contending that the credit should have been allowed because the income on which the UBFT was based was the husband's personal income he earned as a sole proprietor doing business in the District of Columbia.

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. The Department has ruled that the UBFT does not qualify for the credit. See Public Document (P.D.) 11-92 (6/2/2011). In addition, in 2012, the General Assembly enacted Senate Bill 681 (Chapter 292, 2012 Acts of Assembly ), effective for taxable years beginning on or after January 1, 2007, to clarify and restore the Department's longstanding policy of allowing a credit only for income taxes that are similar to Virginia's individual income tax. See P.D. 12-108 (7/1/2012). This Act was codified at Va. Code § 58.1-332.2.

Virginia Code § 58.1-332.2 A defines an "income tax" as a term of art that refers to a specific type of tax levied on all of a resident's earned and unearned income, and all income of a nonresident from sources within the jurisdiction, which is similar to the income tax that Virginia imposes on resident and nonresident individuals. Virginia Code § 58.1-332.2 B includes examples of taxes that do not qualify for the credit, even though they may be measured, in part, by income. Taxes do not qualify because (i) they are labeled as a franchise or license tax, and (ii) they do not tax all income of the individual. Examples of taxes that do not qualify for the credit pursuant to Va. Code § 58.1-332.2 include the UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108.

Pursuant to Va. Code § 58.1-332.2 and in accordance with the Department's longstanding policy, the UBFT does not qualify for the credit under Va. Code § 58.1­-332. The fact that the husband paid the UBFT on business income as a sole proprietor does not render the UBFT a qualifying tax under Va. Code § 58.1-332.2.

Accordingly, the assessment is correct and remains due and payable. An updated bill will be issued shortly to the Taxpayers. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections 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/1-6031720144.M