August 2024

Employee or Independent Contractor for Withholding Purposes: The Virginia Tax Commissioner (Commissioner) recently issued Document No. 24-60 pertaining to the application of the withholding tax to a taxpayer operating a drywall and painting business in Virginia. Upon audit of the taxpayer, the Virginia Department of Taxation (Department) concluded that some of the taxpayer's workers who were classified as independent contractors should have been classified as employees. An assessment was issued to the taxpayer for withholding tax as well as civil penalties; and thereafter the taxpayer filed an application for correction, contending that the workers in questions were independent contractors. The Commissioner in this Document noted that Virginia law provides if an individual performs services for an employer for remuneration, that individual shall be considered as an employee by the party that pays that remuneration unless such individual or his employer demonstrates that such individual is an independent contractor. Pursuant to IRS guidelines, the Commissioner noted that the Department adopted the common-law analysis to determine whether an individual is an employee or independent contractor. The Commissioner in this Document then reviewed various tests which include not only behavioral control, but also financial control, and the type of relationship between the employer and the worker performing the services. With respect to behavioral control, the Commissioner noted in the Document that the Department's auditor concluded that employee relationship existed because the taxpayer told the workers what job to perform; however, the audit did not explain how the taxpayer controlled the work, and merely communicating to a worker about what job to perform is insufficient by itself to support a conclusion that an employee relationship exists. With respect to the financial control, the auditor indicated that the workers did not carry their own liability insurance and that the taxpayer carried the risk of the work; however, the Commissioner noted in the Document that the fact that a worker does not have insurance does not necessarily mean that the worker did not at least share in the risk of loss since even an uninsured contractor can be sued for damages even though they do not have liability insurance. With respect to the type of relationship, the audit report stated that the taxpayer's workers did what regular employees do for their employer but the Commissioner noted in the Document that the report failed to identify any other factor as to the type of relationship upon in which to base a finding that an employee relationship existed. In particular, the Commissioner noted in the Document the taxpayer did not have a written contract with any of its workers, they were engaged orally for a particular job, and that the taxpayer further indicated that the workers were only used for one or two projects a year and were provided with Form 1099 for each year as required. Based on the foregoing and other facts as set forth in the Document, the Commissioner determined that the Department's audit report and documentation failed to show that the taxpayer improperly characterized the workers as independent contractors and, thus, the assessment was abated. The Commissioner noted, however, that the Department has the authority to conduct similar worker classification audits in subsequent years. More information can be found here.

July 2024

Sales Tax Holiday Begins August 2, 2024: The Virginia Department of Taxation (Department) recently published information regarding the upcoming sales tax holiday beginning August 2, 2024, and ending August 4, 2024. According to that published information, during the sales tax holiday the purchase of qualifying school supplies, clothing, footwear, hurricane and emergency preparedness items, and Energy Star and WaterSense products may be made without paying the sales tax. Qualified school supplies are limited to $20 or less per item, and qualified clothing and footwear are limited to $100 or less per item. Certain purchase price limitations also apply to hurricane and emergency preparedness products, as well as to Energy Star and WaterSense products. A detailed list of qualifying items and more information through this publication. More information can be found here.

May 2024

Guidelines/Deadline for Retroactive Taxable Year 2021 PTE Election: The Virginia Department of Taxation (Department) recently issued Guidelines, Document No. 24-12, with respect to a pass-through entity (PTE) having the option to pay an elective income tax (PTET) for taxable year 2021. By way of brief background, the Virginia General Assembly enacted legislation in 2022 that permitted a PTE to make an election for PTET, such legislation being effective for taxable years beginning on or after January 1, 2021; and also allowed the corresponding refundable income tax credit to certain PTE owners for income tax paid by the PTE if the PTE makes the election and pays the elected income tax imposed at the entity level. During the 2023 Session, the General Assembly removed the requirement that the PTE be 100 percent owned by a natural person or persons eligible to be shareholders of an S corporation in order to make the election to pay the PTET. These changes are effective for taxable years beginning on or after January 1, 2021. The Guidelines published by the Department state that they are intended to provide guidance to taxpayers regarding the elective income tax and corresponding refundable credit. The Guidelines set the criteria for making the election retroactive for the 2021 year as well as address the required filing by PTE of the retroactive taxable year 2021 PTET returns and the accompanying schedules and making any tax payments electronically. The Guidelines provide that an electing PTE is required to pay in full the PTET owed by the time they file their 2021 Form 502 PTET and must file that Taxable Year 2021 Form 502 PTET by September 16, 2024. The Guidelines provide that no retroactive Taxable Year 2021 PTET returns will be accepted after that date, and there are no extensions or late filing options. The Guidelines contain various other information regarding this retroactive option. Further, the Guidelines include information for an eligible owner claiming a refundable PTE credit against a Virginia income tax. More information can be found here.