Did this taxpayer succeed in proving he had changed his domicile from Virginia to Maryland, and could he still get credit for the Maryland tax he paid?

Subject

Residency : Domicile - Establishing a Change Credit: Taxes Paid Other States -Maryland Reciprocity

Plain-English summary

The Virginia Department of Taxation learned from the IRS that the taxpayer may have owed Virginia income tax for 2015 and 2016 but had not filed returns for either year. After the Department asked for information and reviewed it, the Department concluded the taxpayer was a Virginia domiciliary resident and assessed him. The taxpayer appealed, arguing he was actually a resident of Maryland.

The Tax Commissioner sided with the Department. To change domicile away from Virginia, a person must (1) actually abandon the old Virginia domicile with no intent to return, and (2) acquire a new domicile elsewhere by being physically present there with intent to remain permanently or indefinitely -- and the burden of proving that change falls on the taxpayer claiming it. The Department had asked the taxpayer (by letter dated February 25, 2020) for documentation to verify his residency status, and while he acknowledged the request, he never provided enough documentation for the Department to find he had abandoned his Virginia domicile. Because the taxpayer had also paid the assessments in full, and the ruling notes that even a taxpayer who kept Maryland domicile could still owe Virginia tax as an "actual resident" if he was physically present in Virginia more than 183 days, the Commissioner had no basis to disturb the assessments on domicile grounds.

There was a silver lining on the tax-credit side. The taxpayer said he had filed Maryland resident returns and reported all of his income to Maryland for both years. Virginia law allows a credit against Virginia tax for taxes properly paid to another state on the same income, limited to the lesser of the tax paid to that other state or the Virginia tax on that same income. Because the Department's assessments had been based on the best information available (not on verified Maryland returns), the Commissioner gave the taxpayer one final 60-day window to submit complete copies of his Maryland returns for 2015 and 2016; if he does, the Department will review them and adjust the assessments and issue refunds as appropriate. If he does not, the assessments stand as issued.

What this means for you

Anyone claiming they moved away from Virginia

Simply saying you moved, or even filing returns in another state, is not enough on its own. You must be ready to affirmatively prove -- with actual documentation -- both that you abandoned your Virginia domicile (with no intent to return) and that you established a new one elsewhere with intent to stay permanently or indefinitely. Relevant proof can include things like financial independence, employment location, income sources, your spouse's residence, marital status, where your real or tangible property sits, and where your vehicle is registered and licensed. If the Department asks for this kind of documentation and you do not supply it, the assessment based on Virginia domicile will stand, even if you actually did move.

Commuters and dual filers between Virginia and Maryland

Virginia has a long-standing reciprocity agreement with Maryland (and also West Virginia and Pennsylvania) so that residents commuting into one state from the other only need withholding in their home state. If Maryland tax was withheld from wages earned while commuting to work there, the fix is to file a Maryland return to get that withholding refunded -- not to assume it changes your Virginia residency status.

Taxpayers who already paid an assessment but have out-of-state tax paid on the same income

Even after an assessment is paid in full, a taxpayer who can show they actually paid income tax to another state on the same income may still be entitled to a credit against the Virginia tax on that income. The credit is capped at the lesser of the tax paid to the other state or the Virginia tax actually imposed on that income -- it is not automatically a dollar-for-dollar wipeout of the assessment.

Common questions

Q: Did the Tax Commissioner agree the taxpayer had become a Maryland resident?
A: No. The Commissioner found the taxpayer had not met his burden of proving he abandoned his Virginia domicile, because he failed to provide the Department with sufficient documentation after it requested proof of his residency status.

Q: Why does it matter who has the burden of proof?
A: Under Va. Code § 58.1-205, a Department assessment is deemed prima facie correct, so the taxpayer -- not the Department -- has to affirmatively show he was not subject to Virginia tax. Va. Code § 58.1-1826 also blocks relief where an erroneous assessment resulted from the taxpayer's own willful failure to provide required information, which the ruling notes was relevant here since the taxpayer never responded fully to the Department's request.

Q: The taxpayer said he filed Maryland returns and paid Maryland tax -- did that automatically fix things?
A: Not by itself. The Department had assessed him using the best information available under Va. Code § 58.1-111, which did not include verified Maryland returns. The Commissioner gave him one last 60-day opportunity to submit complete copies of his Maryland returns for 2015 and 2016; if he does, the credit for taxes paid to another state under Va. Code § 58.1-332 A can be applied and the assessments adjusted, with refunds issued as appropriate.

Q: Is the credit for taxes paid to Maryland equal to the full amount he paid Maryland?
A: Not necessarily. Per P.D. 97-301, the credit is limited to the lesser of the amount actually paid to the other state or the amount of Virginia tax actually imposed on the income earned or derived in that other state.

Q: Could the taxpayer owe Virginia tax even if he really had switched his domicile to Maryland?
A: Possibly. The ruling notes that even if he had retained Maryland domicile, he could still have been an "actual resident" of Virginia -- and therefore subject to Virginia tax -- if he maintained a place of abode in Virginia for more than 183 days of the taxable year, per Va. Code § 58.1-302.

Citations and references

Statutes:

• Va. Code § 58.1-302 (definitions of domiciliary resident and actual resident)
• Va. Code § 58.1-342 B (Department's authority to enter reciprocal income tax agreements; Virginia's agreement with Maryland, West Virginia, and Pennsylvania)
• Va. Code § 58.1-332 A (credit for taxes paid to another state, limited to the lesser of tax paid there or Virginia tax on that income)
• Va. Code § 58.1-205 (Department assessment deemed prima facie correct)
• Va. Code § 58.1-1826 (no relief for erroneous assessments attributable to a taxpayer's willful failure to provide required information)
• Va. Code § 58.1-111 (assessments may be based on the best information available to the Department)
• P.D. 97-301 (7/7/1997) (credit for taxes paid to another state limited to the lesser amount)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-23

Original ruling text

February 23, 2021

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 “Taxpayer”) for the taxable years ended December 31, 2015 and 2016.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia income tax return for the 2015 and 2016 taxable years. A review of the Department’s record showed that the Taxpayer had not filed a return for either year. The Department requested additional information from the Taxpayer in order to determine if his income was taxable in Virginia. After reviewing the information provided, the Department determined that he was a domiciled resident of Virginia and issued assessments. The Taxpayer appeals, contending he was a resident of Maryland.

DETERMINATION

Domicile

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.

In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of providing that the domicile has been changed lies with the person alleging the change. In determining domicile, consideration may be given to the individual's expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, situs of real or tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person's domicile. A person's true intention must be determined with reference to all the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.

The Department determines a taxpayer's intent through the information provided. A taxpayer has the burden of proving that he or she abandoned his or her Virginia domicile. If the information is inadequate to meet this burden, the Department must conclude that he or she intended to remain indefinitely in Virginia.

By letter dated February 25, 2020, the Department requested the Taxpayer provide documentation in order to verify his residency status. The Taxpayer acknowledged the request, but failed to provide sufficient documentation on which the Department could make an informed decision concerning his domiciliary residence or tax liability. The Taxpayer has also paid the assessments in full. Even if he retained Maryland domicile, it appears he could have been an actual resident of Virginia if he was in the Commonwealth for more than 183 days.

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.

In this instance, the Taxpayer has indicated that he filed resident income tax returns and reported all of his income to Maryland for the 2015 and 2016 taxable years. Under the Reciprocal Income Tax Agreement Between Commonwealth of Virginia and State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only. If a Virginia resident has Maryland income tax withheld from wages earned while commuting to work in Maryland, the taxpayer should file an income tax return with Maryland in order to receive a refund.

Credit for Taxes Paid to 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. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997).

CONCLUSION

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 Taxpayer to show he was not subject to income tax in Virginia. Further, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeing 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 Taxpayer has failed to respond to the Department’s information request, there is no basis to adjust the assessments.

The assessments at issue, however, were made based on the best information available to the Department pursuant to Virginia Code § 58.1-111. The Taxpayer has stated that income tax returns were filed for the taxable years in question with Maryland. Therefore, the Taxpayer may be entitled to a credit for taxes paid to another state. As such, the Taxpayer will be granted one last opportunity to provide complete copies of the Maryland tax returns for the taxable years at issue. The documentation or return should be submitted within 60 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 the assessment will be adjusted and refunds issued, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered to be correct as issued.

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/3255.A

Related Documents

97-301