United States

Virginia: Payroll Factor Numerator Should Match Wages Reported for State Unemployment Purposes

Sep 14, 2015
From KPMG TaxWatch

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In a recent ruling, the Virginia Tax Commissioner upheld the Department of Taxation’s increase to the taxpayer’s Virginia payroll factor numerator to match the amounts reported for state unemployment insurance purposes. The Commissioner concluded that there was a lack of evidence to support the taxpayer’s claim that certain employees performed work solely outside Virginia.

The tests for determining whether compensation must be reported to the Virginia Employment Commission (VEC) for unemployment insurance purposes are nearly identical to the tests for whether compensation must be included in the Virginia payroll factor. Thus, there is a strong presumption that total wages reported to the VEC represents compensation paid or accrued in Virginia for payroll factor purposes. However, it is only if an employee’s services are performed partly within Virginia that the tests for determining Virginia compensation are invoked. In this case, the taxpayer asserted that many of its employees performed all of their work in foreign countries (and had been reported to the VEC as a matter of convenience), and therefore, their wages should be excluded from the Virginia payroll factor numerator. In the taxpayer’s view, employee wages subject to Virginia income tax withholding were more representative of the taxpayer’s employees’ actual services performed in Virginia and should therefore be utilized for determining the Virginia payroll factor numerator.

Although the Commissioner acknowledged that there may be circumstances under which amounts reported to the VEC may differ from the compensation properly included for payroll factor purposes, in his view the taxpayer did not present objective evidence to support its claim. The Commissioner agreed to give the taxpayer 60 days to present clear and cogent evidence that the employees at issue did not perform work in Virginia. For more information on Virginia Public Document No. 15-166, please contact Diana Smith at (703) 286-8214.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.