I paid DC's Unincorporated Business Franchise Tax on my business income -- can I claim Virginia's credit for taxes paid to another state to avoid being taxed twice on the same income?

Plain-English summary

A Virginia taxpayer filed an amended 2018 return claiming a credit for the District of Columbia's Unincorporated Business Franchise Tax (UBFT), which she'd paid on business income earned through DC operations. The Department disallowed the credit and denied the resulting refund. On appeal, the taxpayer argued the income underlying the UBFT was genuinely business income (not wage income already covered by a separate DC/Virginia commuter agreement), and that allowing the credit was necessary to prevent the same income from being taxed twice.

The ruling explains that Virginia's credit statute treats "income tax" as a specific legal term, not just any tax that happens to be measured by income. A tax doesn't qualify for the credit if it's labeled a franchise or license tax AND it doesn't tax all of an individual's income -- and the Department has consistently held, across a string of prior rulings going back over a decade, that DC's UBFT fits squarely in that excluded category, alongside similar taxes like the Texas Margin Tax and the Ohio Commercial Activity Tax. The taxpayer's argument that her income was genuinely business income (as opposed to wage income) didn't change the outcome, because the statute excludes the UBFT specifically by name and type, regardless of how the underlying income would otherwise be characterized. The Department also noted it had already separately determined that denying the credit -- even though it results in the same income being taxed by both DC and Virginia -- doesn't create an unconstitutional double-taxation problem. The refund denial was upheld.

What this means for you

Virginia residents who pay DC's Unincorporated Business Franchise Tax on business income

Don't expect to offset that tax with Virginia's ordinary out-of-state credit. This ruling confirms a long, consistent line of Department decisions excluding the UBFT from the credit, meaning the same business income can be taxed by both DC and Virginia with no offsetting mechanism through this credit.

Anyone earning income through a business entity subject to a franchise-style tax in another jurisdiction (not just DC)

Check whether the specific tax you're paying is structured as a true income tax (taxing all of your income) or as a franchise/license/margin-style tax that only reaches certain income. Virginia's credit statute specifically excludes the latter category by name for several jurisdictions -- confirm your particular tax isn't on that list before counting on the credit.

Anyone facing genuine double taxation because a credit doesn't apply

This ruling confirms the Department's position that resulting double taxation from denying this particular credit doesn't violate any constitutional protection. If double taxation genuinely burdens you, structuring your business differently (rather than relying on this credit) may be the more realistic solution.

Common questions

Q: Does Virginia give a credit for the District of Columbia's Unincorporated Business Franchise Tax?
A: No. This ruling confirms a consistent, decade-plus line of Department rulings holding that DC's UBFT doesn't qualify for Virginia's out-of-state credit, because it's classified as a franchise/license-type tax that doesn't tax all of an individual's income.

Q: Does it matter whether my UBFT-taxed income was business income rather than wage income?
A: No, according to this ruling. The exclusion applies to the UBFT itself, regardless of whether the underlying income would otherwise qualify as business income for other purposes.

Q: Is it unconstitutional for Virginia to deny this credit even though it results in double taxation?
A: Not according to this ruling and the prior ruling it cites -- the Department has determined that denying the credit for the UBFT does not create an unconstitutionally discriminatory tax scheme, despite the resulting double taxation.

Citations and references

• Va. Code § 58.1-332 A (credit for income tax paid to another state on income also taxed by Virginia)
• Va. Code § 58.1-332.2 (defines "income tax" for credit purposes; excludes taxes labeled as franchise/license tax that don't tax all income)
• P.D. 11-92 (6/2/2011), P.D. 15-89 (4/28/2015), P.D. 18-166 (9/26/2018), P.D. 19-107 (9/18/2019) (consistent Department rulings that DC's UBFT does not qualify for the out-of-state credit)
• P.D. 12-108 (7/1/2012) (examples of excluded taxes: DC's UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax)
• P.D. 19-107 (9/18/2019) (denying the credit for UBFT does not create an unconstitutionally discriminatory tax scheme)

Subject

Credit : Tax Paid to Another State - District of Columbia

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-167

Original ruling text

December 28, 2021

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the denial of the individual income tax refund requested by your client, * (the “Taxpayer”), for the taxable year ended December 31, 2018. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed an amended Virginia resident income tax return for the 2018 taxable year claiming a credit for Unincorporated Business Franchise Tax (UBFT) paid to the District of Columbia. Under review, the Department disallowed the credit and denied the requested refund. The Taxpayer appeals, contending the tax paid qualifies for Virginia’s credit for taxes paid to other states and granting the credit is necessary to prevent double taxation.

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 consistently ruled that tax paid pursuant to the UBFT does not qualify for the out-of-state tax credit. See Public Document (P.D.) 11-92 (6/2/2011), P.D. 15-89 (4/28/2015), P.D. 18-166 (9/26/2018), and P.D. 19-107 (9/18/2019). In addition, Virginia Code § 58.1-332.2 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 nonresidents 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 if (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 Virginia Code § 58.1-332.2 include the UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108 (7/1/2012).

The Taxpayer asserts that because the income reported on her UBFT return is business income, it qualifies for the out-of-state tax credit as it is not wage income covered by the multi-state compact with the District of Columbia. This argument, however, is irrelevant because the Virginia statute specifically prohibits a credit for the UBFT. In addition, the Department has determined that the risk of double taxation from denying credit for UBFT paid does not result in an unconstitutionally discriminatory tax scheme. See P.D. 19-107.

Pursuant to Virginia Code § 58.1-332.2 A and in accordance with the Department's longstanding policy, the UBFT does not qualify for the out-of-state tax credit under Virginia Code § 58.1-332. In addition, the risk of double taxation does not require the allowance of the credit. Accordingly, the Department’s disallowance of the credit on the Taxpayer’s amended 2018 return and consequent denial of the refund are upheld.

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/3600.X

Related Documents

19-107

11-92

15-89

18-166

12-108