23VAC10-140 Income Tax Withholding

REGULATIONS

Vol. 33 Iss. 7 - November 28, 2016

TITLE 23. TAXATION

DEPARTMENT OF TAXATION

Chapter 140

Fast-Track Regulation

Title of Regulation: 23VAC10-140. Income Tax Withholding (amending 23VAC10-140-10).

Statutory Authority: § 58.1-203 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: January 27, 2017.

Effective Date: February 13, 2017.

Agency Contact: James Savage, Tax Policy Analyst, Department of Taxation, P.O. Box 27185, Richmond, VA 23219, telephone [phone], or email [e-mail].

Basis: Section 58.1-203 of the Code of Virginia provides that the "Tax Commissioner shall have the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department." The authority for the current regulatory action is discretionary.

Purpose: This regulatory action is needed to amend 23VAC10-140-10 that does not conform to legislative changes and current tax policy. Many of the definitions in this section are repealed because they provide no additional guidance to clear and unambiguous statutes. Other definitions are updated so that they conform to legislative changes and current tax policy. Amendment of this section does not reflect any change in existing tax policy and has no impact on the administration of the tax. As this regulatory action does not reflect a change in existing departmental policy, it will have no effect on the health, safety, and welfare of citizens.

Rationale for Using Fast-Track Rulemaking Process: The fast-track rulemaking process is intended for proposed regulations that are expected to be noncontroversial. As the regulation will be amended to reflect current law and will not make any changes to the department's current policy regarding income tax withholding, this action is not expected to be controversial. The department has issued numerous published ruling letters and other public documents  that address income tax withholding. These public documents and recent law changes form the basis for the proposed changes to this regulation.

Substance: This regulatory action will amend 23VAC10-140-10, relating to income tax withholding definitions. Many of these definitions are outdated because they have not been amended to conform to the following legislation enacted by the General Assembly:

• House Bill 1734 (1991 Acts of Assembly, Chapter 362) and Senate Bill 765 (1991 Acts of Assembly, Chapter 456): This legislation amended Virginia withholding requirements to conform to federal withholding requirements. See public document 91-297.

• House Bill 950 (1987 Acts of Assembly, Chapter 531); Senate Bill 623 (1993 Acts of Assembly, Chapter 54), and House Bill 1079 (2014 Acts of Assembly, Chapter 225): This legislation amended Virginia withholding requirements to require withholding of tax on certain prizes paid by the Virginia Lottery.

• Senate Bill 389 (1992 Acts of Assembly, Chapter 519): This legislation excluded from withholding individual retirement plans and simplified employee pension plans.

Many of these definitions are also unnecessary because they provide no additional guidance to clear and unambiguous statutes. Therefore, this regulatory action will repeal definitions that are unnecessary and will update all other definitions to conform legislative changes and current tax policy.  Amending this section does not reflect any change in existing tax policy and will have no impact on the administration of tax. Because of this, the amendment of this section is not expected to be controversial.

Issues: This regulatory action will ease voluntary taxpayer compliance and the Department of Tax's administration of the state tax laws by amending a regulation section that does not conform to legislative changes and current policy. Amending of this regulatory section will result in no disadvantage to the public or the Commonwealth.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. The Department of Taxation (Department) proposes to revise or repeal several definitions related to income tax withholding.

Result of Analysis. The benefits likely exceed the costs for all proposed changes.

Estimated Economic Impact. This regulation contains definitions related to income tax withholding that are either unnecessary in light of clear and unambiguous statutes or are in conflict with statutes or current tax policy. For example, the current definition of "employee" does not conform to Chapter 519 of 1992 Acts of Assembly and therefore the Department proposes a new definition to replace the old one. The definition of "wages" is also being revised due to enactment of various other statutes. The Department further proposes to repeal definitions of "commissioner," "miscellaneous payroll period," and "payroll period" because they are unnecessary. Since the proposed amendments have no impact on existing tax policy, no significant economic impact is expected. However, the proposed changes are beneficial because they will improve the clarity of the regulation.

Businesses and Entities Affected. This regulation applies to individuals and businesses subject to income tax withholding. In fiscal year 2014, approximately 244,598 entities paid Virginia income tax withholding. In addition, according to the 2013 North American Industry Classification System, there were 1,154 certified public accountant (CPA) establishments, 628 non-CPA tax preparation establishments, and 1,187 non-CPA establishments offering accounting, bookkeeping, or billing services along with payroll services in Virginia.

Localities Particularly Affected. The proposed changes apply statewide.

Projected Impact on Employment. No impact on employment is expected.

Effects on the Use and Value of Private Property. No impact on the use and value of private property is expected.

Real Estate Development Costs. No impact on real estate development costs is expected.

Small Businesses:

Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Costs and Other Effects. The Department of Taxation estimates that there are about 143,612 small businesses with employees in Virginia. In addition, almost all tax preparation or payroll service providers are small businesses. The proposed amendments do not impose costs on these entities, but will benefit them by improving the clarity of the regulation.

Alternative Method that Minimizes Adverse Impact. No adverse impact on small businesses is expected.

Adverse Impacts:

Businesses. A small percentage of the entities this regulation applies to is believed to be non-small businesses. The proposed amendments do not impose any adverse impact on them.

Localities. The proposed amendments will not adversely affect localities.

Other Entities. The proposed amendments will not adversely affect other entities.

Agency's Response to Economic Impact Analysis: The Department of Taxation agrees with the Department of Planning and Budget's economic impact analysis.

Summary:

The amendments repeal definitions that are unnecessary and update other definitions to conform to legislative changes and current tax policy. The amendments neither reflect a change in existing tax policy nor have an impact on the administration of the tax.

23VAC10-140-10. Definitions.

For the purpose of this chapter and unless otherwise required by the context The following words and terms when used in this chapter shall have the following meanings unless the context clearly indicates otherwise:

"Commissioner" means the Tax Commissioner.

"Employee" includes an individual, whether a resident or nonresident of Virginia, who performs or performed any service in Virginia for wages, or a resident of Virginia who performs or performed any service outside Virginia for wages. The word "employee" also includes an officer, employee, or elected official of the United States, Virginia, or any other state or any territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing or an officer of a corporation. means "employee'' as defined in § 58.1-460 of the Code of Virginia. The relationship of employer and employee is determined in accordance with the test set forth in 26 CFR 31.3401(c)-1.

"Employer" means the Commonwealth of Virginia, or any of its political subdivisions, the United States, or any agency or instrumentality of any one or more of the foregoing, or the person, whether a resident or a nonresident of Virginia, for whom an individual performs or performed any service as an employee, except that:

1. If the person, governmental unit, or agency thereof, for whom the individual performs or performed the service does not have control of the payment of the wages for such services, the term "employer" (except as used in the definition of "wages" herein) means the person having control of the payment of such wages. For example, where wages, such as certain types of pensions or retired pay, are paid by a trust and the person for whom the services were performed has no legal control over the payment of such wages, the trust is the "employer."

2. In the case of a person paying wages on behalf of a nonresident person not engaged in trade or business within Virginia or on behalf of any governmental unit or agency thereof not located within Virginia, the term "employer" (except as used in the definition of "wages" herein) means such person.

For Virginia purposes, whether the relationship of employer and employee exists is determined in accordance with the test set forth in U.S. Treasury Reg. Section 31.3401(c)-1.

"Miscellaneous payroll period" means a payroll period other than a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semiannual, or annual payroll period.

"Payroll period" means a period for which a payment of wages is ordinarily made to the employee by his employer.

"Wages" means all remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash. Wages paid in any form other than money are measured by the fair value of the goods, lodging, meals or other consideration given in payment for services. "Wages" does not include remuneration paid as follows:

1. As fees to a public official.

2. For agricultural labor where remuneration is paid to workers employed on the farm for services rendered on the farm in the production, harvesting, and transportation of agricultural products to market for the farmer-employer.

3. For domestic service in a private home, local college club, or local chapter of a college fraternity or sorority.

4. For service not in the course of the employer's trade or business performed in any calendar quarter by an employee, unless the cash remuneration paid for the service is $50 or more and the service is performed by an individual who is regularly employed by the employer to perform the service.

The term "service not in the course of the employer's trade or business" includes services that do not promote or advance the trade or business of the employer. As used in this section, the term does not include service not in the course of the employer's trade or business performed on a farm operated for profit or domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Remuneration paid for service performed for a corporation does not come within the exception.

An individual is "regularly employed by an employer during a calendar quarter" only if:

(i) The individual performs service not in the course of the employer's trade or business for such employer for some portion of the day on at least 24 days (whether or not consecutive) during such calendar quarter; or

(ii) The individual was regularly employed (as determined under subparagraph (i) above) by the employer in the performance of service not in the course of the employer's trade or business during the preceding calendar quarter.

5. For services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of the ministry or by a member of a religious order in the exercise of duties required by such order.

6. For services not in the course of the employer's trade or business, to the extent paid in any medium other than cash.

7. To, or on behalf of, an employee or his beneficiary from or to a trust described in IRC § 401(a) which is exempt from tax under IRC § 501(a) at the time of such payment unless such payment is made to an employee of the trust as remuneration for services rendered as such employee and not as a beneficiary of the trust. A qualified cash or deferred arrangement meeting the requirements of IRC § 401(k) is deemed to be a trust described in IRC § 401(a).

8. To, or on behalf of, an employee or his beneficiary under or to an annuity plan which, at the time of such payment, meets the requirements of IRC § 401(a)(3), (4), (5), and (6).

9. For acting in or service as a member of the crew of a (i) motion picture feature film, (ii) television series or commercial, or (iii) promotional film filmed totally or partially in Virginia by an individual or corporation which conducts business in Virginia for fewer than 90 days of the tax year and when such film series or commercial is processed, edited and marketed outside Virginia. Every such individual or corporation shall, immediately after the filming of such portion of the film, series or commercial filmed in Virginia, file with the Commissioner on forms furnished by the Department, a list of the names and social security account numbers of each actor or crew member who is a resident of Virginia and is compensated by such individual or corporation.

The exclusion from "wages" of the remuneration set forth in subdivisions 1 through 9 above does not exempt the recipient from income tax liability for such remuneration.

"Wages" means "wages'' as defined in § 58.1-460 of the Code of Virginia. The exclusion from wages of a payment does not exempt the payee from income tax liability for the payment. However, the payee and the payor may agree pursuant to § 58.1-466 of the Code of Virginia to have amounts withheld from payments that are not considered wages. A payor who voluntarily withholds income tax consents to be treated as an employer making payment of wages subject to Article 16 (§ 58.1-460 et seq.) of Chapter 3 of Title 58.1 of the Code of Virginia and this chapter.

VA.R. Doc. No. R17-4745; Filed November 2, 2016, 3:53 p.m.