Each year, a small group of Virginia tax lawyers convenes to meet with the Virginia Tax Commissioner, his staff, and the Attorney General’s staff to hear what the Tax Department is thinking, learn about its challenges, and discuss ideas for improved tax administration in Virginia. Our recent Zoom call provided several key updates of interest.
Hiring Freeze Ended and Auditors being Hired
The State’s hiring freeze ended for the Tax Department, and it’s trying to fill past retirements by hiring more analysts and a mix of field and desk auditors. With COVID restrictions, staffing at the main Westmoreland processing plant had to be cut, and paper filings slowed processing even further. It’s worth noting that 88% of individual tax returns are now filed electronically, up from 66% 10 years ago. Because automation seems to make the State’s processing easier, expect to see a continued push for efiling.
Identity Theft and Refund Fraud Continues to Increase
The Tax Department’s battle against fraudulent refund filings rages on as the number of forged claims continues to rise. So far this year, the State has caught and denied more than $59 million in fraudulent 2019 refunds. The additional scrutiny required to identify those cases continues to slow processing of Virginia tax returns.
Partnership LLC Audits
In light of the federal change to auditing LLC partnerships at the entity level, Virginia now allows state audits at the LLC partnership entity level. LLC partnerships who have final tax determinations from a federal audit are now required to notify the Tax Department within 90 days thereafter of the result so that Virginia can assess their piggyback tax. Virginia also permits the partnership to pay the Virginia audit assessed tax on behalf of its partners.
Attacking Worker Misclassification 1099 or W-2
As a result of past joint studies by Virginia agencies and new laws this year, any individuals performing services for an employer for pay will likely be presumed to be employees and have W-2 status, unless they can prove that they’re independent contractors (using the IRS guidelines). It appears that the burden of proof is on the paying “employer” or the recipient individual—not the Tax Department. Historically, these cases were many times picked up from the VEC or unemployment claims, and then referred to the Tax Department. The dollar penalties are increased. A private right of action is now included, as well as lawyer fees. For companies contracting with Virginia state or localities, there’s an extra penalty for misclassification – that of being debarred from government contracts.
Wayfair Decision Sales Tax Nexus Extended to Tobacco Taxes
The 2018 U.S. Supreme Court’s Wayfair decision permitted states to require out-of-state sellers to collect sales tax on in-state sales if that seller had a significant “economic” relationship to the taxing state. An actual “physical” presence within a state was no longer required for making nonresident businesses collect sales taxes for other states. Virginia applied the Wayfair rule to its sales tax collections in 2019. This year, Virginia has extended it to tobacco taxes, using the same economic relationship thresholds as sales taxes (more than $100,000 of gross Virginia revenue or at least 200 transactions annually). Still waiting to see if, when, and how Wayfair will be extended to the income tax arena.
Keep Copies of Live Chat with Virginia Tax Website – You May Win
In a recent actual tax appeal where an auditor (and the Tax Department) determined that a taxpayer was a domiciliary of Virginia and thus subject to tax, the taxpayer had earlier sought advice from the Live Chat function of the Virginia Tax website. She was told during that Live Chat that she was not required to file a Virginia tax return. She kept a transcript of that Live Chat and submitted it on appeal. The Tax Commissioner agreed that since the Tax Department gave her that advice (although maybe in error), she won her appeal and the tax was abated.
We hope this information is useful to you. If you have any questions about the Tax Roundtable discussions, or if we may help with any matters, please feel free to contact OFP Shareholder David Lawrence at 703-218-2181 or any member of the OFP Tax Group.