Following the trend of many other states—most recently New Hampshire—West Virginia has adopted market-based sourcing for corporate income tax apportionment purposes. The state currently uses a cost-of-performance method to source sales other than tangible personal property. The enacting legislation (House Bill 2026) was signed by West Virginia Gov. Jim Justice on April 9, 2021. The noted changes are effective for tax years beginning on or after January 1, 2022.
In addition to the adoption of market-based sourcing, the legislation changes the income tax apportionment factor composition from a three-factor, double-weighted sales method to a single sales factor method. The bill also removes the “throwout” rule that excludes sales of tangible personal property shipped to a state where the taxpayer does not have nexus from the sales factor.
The chart below compares the West Virginia corporation income apportionment method for sales of other than tangible personal property before and after the enacted legislation.
The legislation also created an exemption for employers required to withhold tax from compensation earned by nonresident employees temporarily working in West Virginia. Compensation paid to nonresident individuals is generally not subject to employer withholding in West Virginia if all criteria below are met:
- Employment duties in the state were performed for 30 or fewer days in the calendar year.
- The individual performed employment duties in more than one state during the calendar year.
- The compensation was not paid to a professional athlete, professional entertainer, or public figure.
- The individual’s state of residence offers a similar exclusion or does not impose an individual income tax, or the individual’s income is exempt from taxation under the Constitution or federal statute.
It is important to note that if a nonresident employee works in West Virginia for more than 30 days, withholding should then be required on all compensation earned in West Virginia, including the previously exempt 30 days. An employee is considered working in West Virginia for a day if the employee performs more of their employment duties in West Virginia than in any other state during that day; time spent in transit is not considered.
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