Did an out-of-state consultant owe Virginia income tax when he worked 105 days at a Virginia client's headquarters?

Subject

Taxpayers who are not residents of Virginia but have Virginia source income are required to file a Virginia nonresident individual income tax return.

Plain-English summary

An individual domiciled in another state contracted with a Virginia business on a government project. He argued that he worked from his out-of-state home office, but he spent 105 days during 2012 at the Virginia company's headquarters.

Virginia taxes nonresidents on income attributable to property or business, trade, profession, or occupation conducted in Virginia. The work performed at the Virginia headquarters appeared to generate Virginia-source income and triggered a nonresident filing requirement.

The consultant had to apportion his contract income using factors that fairly measured the services performed in Virginia. Virginia activities could include consulting work, negotiations, meetings, and other business conducted within the state.

Because the existing assessment used the best information available, Virginia gave the consultant 45 days to file a 2012 nonresident return. The Department would adjust the assessment from that filing; without it, the assessment would be treated as correct and collection could follow.

Citations and references

• Va. Code §§ 58.1-325, 58.1-302, and 58.1-111.
• P.D. 97-136.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-56

Original ruling text

April 11, 2016

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you request correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a domiciliary resident of * (State A), contracted with a Virginia business to provide consulting services on a government contract. The Department received information from the Internal Revenue Service (IRS) that the Taxpayer may have income subject to Virginia income tax. The Department requested additional information from the Taxpayer. When no response was received, the Department issued an assessment for 2012 taxable year. The Taxpayer appeals the assessment, contending he works from his home office in State A.

DETERMINATION

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as "an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources." Virginia Code § 58.1­302 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. As such, taxpayers who are not residents of Virginia but have Virginia source income are required to file a Virginia nonresident individual income tax return.

The Taxpayer spent 105 days in Virginia during the 2012 taxable year at the headquarters of the Virginia business. Presumably, a portion of his earnings under the contract resulted from activities he conducted in Virginia. Under Virginia statute, the Taxpayer appears to have had Virginia source income for the 2012 taxable year, and was required to file a Virginia nonresident return.

A taxpayer, who earns trade or business income in Virginia, must apportion his income to determine the amount attributable as Virginia source income. Such attribution should be based upon factors that most equitably determine the Taxpayer's portion of total income that is attributable to services performed in Virginia. Services performed in Virginia would include, but not be limited to, consulting activities, contract negotiations, business meetings, and any other business activity that the Taxpayer conducted while performing services within the geographical boundaries of Virginia. P.D. 97-136 (3/21/1997).

The assessment at issue was made based on the best information available to the Department pursuant to Va. Code § 58.1-111. The Taxpayer may have information that better represents his Virginia income tax liability for the year at issue. Therefore, the Taxpayer will be granted one last opportunity to file a 2012 Virginia nonresident individual income tax return. The return should be submitted within 45 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *. Upon receipt, the documentation will be reviewed and assessment will be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered to be correct as issued and collection actions may result.

The Code of Virginia sections, and public documents 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/1-6048701080.D