Virginia imposes many taxes on both individuals and businesses. Below are some of the major facets of these taxes, which require an understanding before conducting any tax planning and also can raise complex questions during an audit. Contact Commonwealth Tax Law to obtain assistance in your tax matter.
In terms of revenue, the Individual Income Tax is the largest tax imposed by Virginia and collected by the Virginia Department of Taxation. Accordingly, it receives quite a bit of attention for purposes of audit. At its beginning, the calculation of Virginia taxable income starts with federal adjusted gross income. From there, there are many Virginia-specific additions, subtractions, and deductions. Once the income tax due is determined, Virginia allows many credits which function as a payment.
All of this is subject to audit including the calculation of federal adjusted gross income which takes place on the federal income tax return. Therefore, an income tax audit can be very broad.
Another aspect of the individual income tax which is a frequent subject of audits is the question of where the taxpayer resides. When audited, the questions here can be very technical and tricky. Whether an individual is a resident of Virginia is determined by the application of two tests. If either test is satisfied, the individual will be treated as a resident of Virginia and all income will be subject to taxation by Virginia.
The first test is one of actual residency. While there are some nuances to this test, it is actually a simple test where days in Virginia are counted. If the individual is in Virginia for more than 180 days, Virginia residency will be asserted.
The other test is to determine where the individual’s domicile is. Unlike the actual residency test, this test is very subjective and the totality of the individual’s facts and circumstances are considered. There is no one fact that is determinative, although some facts receive more focus than others. Knowing what needs to be done before you begin the process of changing your residency can be quite beneficial. Regardless of whether you have consulted with someone, it is very important that you obtain representation as soon as possible if an audit is being conducted. Being represented early can mean the difference between resolving the matter during the audit and going through a long appeals process that can be frustrating and potentially expensive.
Pass through entities are businesses such as partnerships and limited liability companies that are taxed at the owner level rather than being taxed at the entity level like a corporation. So while these entities must apportion their income when they operate in other states, they report their income to their owners who pay the income tax on such income with their personal income. Of course it is not that simple. The entity can be required to withhold income tax from nonresident owners. Pass through entities have rules in Virginia that they must adhere to.
Like the individual income tax, the corporate income tax is based off of the determination made on the federal income tax return. Federal taxable income is used as a starting point in Virginia for the corporate income tax. And also like the individual income tax, there are many additions, subtractions, and deductions that must be applied as well as credits that may be claimed against the tax that is due. Virginia, and all states, are required to permit multistate businesses to apportion their income for purposes of taxation so that Virginia may not tax income earned in another state. Corporate income tax audits can be cumbersome and knowing what information is needed is half the battle.
The Virginia retail sales and use tax is a privilege tax imposed on the sale of all tangible personal property and some services, all when sold at retail, and the use of tangible personal property if not purchased in Virginia. Virginia has many exemptions that also have to be considered. There are exemptions for certain non-profit organizations, manufacturers, governmental entities, and many more. In addition, some exemptions do not focus on the party making the sale or purchase but rather the item that is being sold. For example, Virginia does not tax certain occasional sales or sales of certain medical equipment. When it comes to most of these exemptions, it is important that the necessary forms be provided to the other party in the transaction in a timely fashion.
And while Virginia taxes a very small amount of sales of services, some sales of services are indeed subject to taxation. Also, out-of-state businesses must determine if they have sufficient contacts with Virginia, referred to as nexus, which will require them to comply with the Virginia retail sales and use tax.
On the whole, determining what sales should be subject to the Virginia retail sales and use tax can be complex. If there is a dispute about what taxes should have been paid, you will need someone who is familiar with the tax and the policies and procedures that make up the tax.
The Virginia recordation tax is a tax that is not administered by the Virginia Department of Taxation. Instead it is administered by local clerks of the circuit court. The tax itself is a hybrid in that there are both state and local components. Further, it is imposed on both parties in many real property transfers. Ultimately, the tax is controlled by the Virginia Code. The tax is imposed when documents, such as certain deeds, leases, and contracts, are recorded with the clerk of the circuit court of the particular locality. The recordation tax has many exemptions and if the tax is misapplied it may be appealed to the Virginia Department of Taxation.
In addition to the taxes mentioned above, Virginia imposes many other taxes including but not limited to a fiduciary income tax, withholding tax, bank franchise tax, communications sales and use tax, fuels tax, motor vehicle rental tax, and tobacco tax. Some of these taxes are very straightforward whereas others are more complex. Especially when dealing with the more complex aspects of these taxes, having experienced legal counsel to advise you can make a large difference. Virginia publicly releases many more rulings and appeal decisions on all of the taxes mentioned above than most other states. Indeed, a thousand rulings and appeal decisions are typically issued in a four or five year span. While this can be seen to be taxpayer friendly, none of these rulings are indexed or summarized anywhere. Furthermore, because they have not been vetted, they have no legal precedence. When you add this to the fact that the Virginia Department of Taxation has been reluctant to promulgate regulations that have legal precedence, a need has been created for legal counsel that understands all of the nuances of these taxes and has followed these rulings and appeal decisions for years.
If the rulings have no legal precedence, why is it important to have legal counsel who has followed these rulings? Even though they have no legal precedence, as has been confirmed by the Supreme Court of Virginia, they do show how the Virginia Department of Taxation applies the tax and how they believe the tax applies. The fact is that until a court, or some other authority, tells the Virginia Department of Taxation that they are wrong in how they apply a tax, they will continue to apply it as how they believe is correct. So having an understanding of the rulings and appeal decisions is necessary for every day matters.
Having over twenty years of experience with Virginia taxation, Christian Tennant has consistently followed these rulings — and even wrote some of them in the early part of his career. He is familiar with the taxes briefly summarized above as well as many other taxes imposed by Virginia.
If you need counsel regarding a matter involving taxes imposed by Virginia, please contact Commonwealth Tax Law.