Could Virginia residents claim a credit for Pennsylvania tax paid on wages when the two states have a reciprocal agreement?

Subject

Virginia residents - reciprocal agreement with Pennsylvania.

Plain-English summary

A married Virginia couple claimed a credit for Pennsylvania income tax paid on the husband's 2015 wages. Virginia denied the credit because the two states' reciprocal agreement generally exempted a Virginia resident's Pennsylvania wages from Pennsylvania income tax.

The result depended on residency facts the couple did not provide. If the husband was only a Virginia resident commuting to Pennsylvania, he should seek a refund from Pennsylvania rather than claim a Virginia credit. If he was also a Pennsylvania statutory resident, reciprocity might not apply and the tax actually owed to Pennsylvania could support a Virginia credit.

Virginia had asked whether the husband commuted and whether the couple qualified as Pennsylvania residents, but received no response. The Department found no basis to adjust the assessment, while allowing one final 30-day opportunity to submit the missing information.

What this means for you

• Reciprocity generally assigns Virginia-Pennsylvania wage tax to the employee's resident state.
• Tax withheld by mistake should usually be refunded by the work state.
• A Virginia credit requires actual legal liability to the other state, not withholding alone.
• Dual-residency or statutory-residency facts can change the analysis and must be documented.

Citations and references

• Va. Code §§ 58.1-342 B, 58.1-332 A, 58.1-205, and 58.1-1826.
• Pa. Stat. Ann. § 7301(p).
• 23 VAC 10-110-221 B 2.
• Reciprocal Personal Income Tax Agreement between Pennsylvania and Virginia (Nov. 19, 1982).
• P.D. 16-198 and P.D. 98-183.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-135

Original ruling text

July 19, 2017

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, 2015.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return and claimed a tax credit for income tax paid to Pennsylvania. Under audit, the Taxpayers provided a copy of their filing declaration showing a Virginia address and indicating tax was paid to Pennsylvania. Because Virginia has a reciprocal agreement with Pennsylvania, and the Taxpayers were Virginia residents, the credit was denied and an assessment was issued. The Taxpayers paid the assessment under protest and filed an appeal contending they are not liable for the additional tax because the husband worked in Pennsylvania during the taxable year at issue.

DETERMINATION

Reciprocity

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia and Pennsylvania.

The information provided indicates the Taxpayers remained domiciliary residents in Virginia during 2015. An individual can be a statutory resident of Pennsylvania if he spends more than 183 days within the state and establishes a permanent place of abode pursuant to Pa. Stat. Ann . § 7301(p). If the husband was neither a domiciliary nor statutory resident of Pennsylvania, the Taxpayers, as Virginia residents, would have been exempt from Pennsylvania income taxation on the wage income he earned there under the reciprocity agreement. See also Public Document (P.D.) 16-198 (10/13/2016).

The Reciprocal Personal Income Tax Agreement between the Commonwealth of Pennsylvania and the Commonwealth of Virginia (11/19/1982) permits Virginia residents commuting daily to have taxes withheld and paid to Virginia only. If a Virginia resident has Pennsylvania income tax withheld from wages earned while commuting to work in Pennsylvania, the resident should file an income tax return with that state in order to receive a refund.

Credit for Taxes Paid Other States

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia income tax return for taxes paid to another state provided the income is either earned or business income. For purposes of the credit, “earned income” includes wages, salaries, or professional fees and other amounts received for professional services actually rendered. See Title 23 of the Virginia Administrative Code (VAC) 10-110-221 B 2. In order to be eligible for the credit, however, Va. Code § 58.1-332 A requires a Virginia resident to “become liable to another state for income tax.”

The out-of-state credit would only apply if the husband's income was actually subject to Pennsylvania income tax. In Public Document (P.D.) 98-183, the Department determined that an individual who was an actual resident of Virginia was required to file Virginia income tax returns as a resident even though he was domiciled in Pennsylvania. Thus, when an individual is a resident of both Virginia and Pennsylvania, the reciprocal between Virginia and Pennsylvania will not apply and income earned in Pennsylvania may be eligible for the out-of-state credit on a Virginia resident return. The Taxpayers filed a return and paid income tax to Pennsylvania for the 2015 taxable year.

By letter dated October 18, 2016, the Department requested additional information to determine if the husband commuted or if the Taxpayers were required to file as actual residents. As of the date of this letter, no response has been received.

Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayers to show they were not subject to income tax in Virginia. Further Va. Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayers' willful failure or refusal to provide the Department with necessary information as required by law. Because the Taxpayers have failed to respond to the Department's information request, there is no basis to adjust the assessment.

I will, however, allow the Taxpayers one more opportunity to provide the information requested to substantiate their claim. The documentation must be provided within 30 days from the date of this letter. Otherwise, the Taxpayer should remit payment of tax and interest within 30 days to avoid the accrual of additional interest. Please send the requested information or payment to the Department's Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections and public documents cited are available on-line at www.tax.Virginia.gov in the Laws, Rules and 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/851.D