How did Virginia tax restricted stock units earned partly from services performed in Virginia?

Plain-English summary

Virginia treated restricted stock unit income as compensation recognized when the units vested rather than when they were granted. A nonresident whose RSUs were earned through services performed partly in Virginia had Virginia-source income and a Virginia filing obligation.

The Department said the most equitable allocation was the ratio of days the taxpayer performed services in Virginia to days services were performed elsewhere. For part-time employees and consultants, an hours-worked ratio could be used. Any gain after the vesting date was investment income rather than Virginia-source compensation.

Common questions

Were all RSUs granted while the taxpayer lived in Virginia fully taxable by Virginia? The ruling did not use the grant location alone. It sourced the compensation according to where the underlying services were performed.

What about appreciation after vesting? The ruling treated post-vesting gain as investment income not taxable as Virginia-source income to the nonresident.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-302, and 58.1-325
• IRC § 83(a)
• Treas. Reg. §§ 1.83-7(a) and 1.409A-1(d)(1)
• P.D. 85-134, P.D. 10-28, and P.D. 99-79

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-114

Original ruling text

June 8, 2018

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling regarding the taxability of restricted stock units issued to your client, * (the “Taxpayer”).

FACTS

The Taxpayer was a resident of Virginia until 2012. From 2004 to 2017, the Taxpayer served on the board of a company located in * (“State A”). The Taxpayer performed services for the board in State A and Virginia. The Taxpayer periodically received grants of restricted stock units (RSUs) as compensation for her services. The Taxpayer's service ended in 2017 while she was a resident of *** (“State B”). The Taxpayer requests a ruling on whether any portion of the RSUs awarded while she was a Virginia resident from 2004 through 2012 are taxable to Virginia.

ANALYSIS

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Virginia Code § 58.1-322.

Under Virginia Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1-302 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.

The taxation of restricted stock is governed by IRC § 83(a), which provides that a taxpayer does not recognize gross income when restricted stock is granted. Instead, a taxpayer recognizes taxable compensation to the extent the fair market value of the stock exceeds the option price at “the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. . .” Treas. Reg. § 1.83-7(a). This event is commonly referred to as “vesting.”

An RSU plan awards a taxpayer the right to receive a fixed payment equal to the value of a specified number of shares of employer stock. Unlike incentive stock options, an RSU plan allows a taxpayer to receive an amount based on the full value of a share, rather than only an amount equal to the increase in value from the date of the grant through the vest date. The IRS treats RSUs like other forms of nonqualified stock options subject to a substantial risk of forfeiture, most specifically like restricted stock. See Treas. Reg. § 1.409A-1(d)(1).

A nonresident who has income from the vesting of RSUs earned while performing services in Virginia is required to file a Virginia income tax return. The Virginia taxable income is computed by multiplying their Virginia taxable income (computed as if they were a resident) by the ratio of their net income, gain, loss and deductions from Virginia sources to their net income, gain, loss, and deduction from all sources. Public Document (P.D) 85-134 (06/18/1985). The factor that most equitably determines the apportionment of income from the RSUs is the ratio of the number of days services were performed in Virginia to the number of days services were performed elsewhere. The Department has previously ruled that a ratio of hours worked in Virginia divided by hours worked anywhere may be used for part-time employees and consultants. See P.D. 10-28 (3/31/2010). Any gain that occurs after the vest date would be considered investment income and would not be taxable as Virginia source income. See Public Document (P.D.) 99-79 (4/20/1999).

This ruling is based on the facts presented as summarized below. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document 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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ****.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1572.A