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January 17, 2013 The Tax Lawyer

Is Home Really Where the Heart Is?: State Taxation of Domiciliaries, Statutory Residents, and Nonresidents in the District of Columbia

Vol. 65, No. 4 - Summer 2012

Aaishah Hashmi


    Can you have more than one home and, if so, which home counts for state tax purposes? It is not uncommon to have a vacation home or even a second primary residence. This is especially the case in an international and capital city like the District, which houses the U.S. federal government, foreign government offices, and nongovernmental and international organizations. Should it matter where you desire your home to be, or should taxation be based solely on objective criteria such as where you are physically present? With the technological landscape in a constant state of evolution, is being physically present as determinable as it used to be? Ultimately, wherever you regard your home to be may not be your tax home. It is clear that you have to either be domiciled or a statutory resident of a state in order to be taxed there, but it is not always clear what domicile or residence means. Inconsistent and overlapping definitions, as well as varying approaches by a multitude of state taxing jurisdictions, further exacerbate the problem and make the threat of double taxation all the more real.

    Part II of this Article outlines the states’ constitutional power to tax both their residents and nonresidents. The fullest exercise of this power leads to the unfair result of multistate taxation because the state of domicile will normally tax its residents on the residents’ worldwide income while nonresidents will be taxed only on the income earned within the state.

    Part III of this Article analyzes the definition and test for domicile, and will evaluate established indicia of domicile or abandonment of domicile and the weight of those factors. The Article also highlights the ambiguities in the definitions of domicile caused by their subjective requirements, like intent, and the inconsistent applications of these requirements contained in case law.

    Part IV will address on the statutory resident, the requirement of maintaining a place of abode, how the 183-day test is evaluated for statutory residency purposes and exceptions to the statutory residency test for certain categories of individuals.

    Part V analyzes the taxation of nonresidents and includes a brief legal history on the District’s prohibition to tax the personal income of nonresidents. It will discuss the various motivations behind and attempts by the District to tax these individuals.

    Part VI reviews current solutions to state double taxation such as the use of state tax credits and reciprocal tax agreements to alleviate some of the multistate tax burdens for these residents and nonresidents including the inadequacies of these approaches.

    Part VII focuses on proposals for improvements by suggesting states consider: a test similar to the federal “substantial presence test,” which is an objective test measured by actual physical presence; streamlining the intent prong analysis by evaluating the immigration credentials for international relocations; and providing a presumption of abandonment of domicile after a certain period of absence from the state of domicile for state income tax purposes. Finally, this Article discusses the competing policy goals of creating an objective jurisdictional standard for state income tax purposes and how those goals can be met while also reducing the potential burden of double taxation for taxpayers.

Read the full article or download the complete issue.