D.C. Simply Owning or Renting a Home in DC May Subject You to DC Income Tax (regardless of whether you live outside DC for the majority of the year) – Statutory Residency in the District of Columbia
As a general proposition, States tend to impose their income taxes on people who reside within the state or who may be part-time residents in that they are physically present in the state for more than 183 days in a year. The District has a statute which adds an additional ground for DC taxation – simply maintaining (regardless of whether the unit is owned or leased) a “place of abode within the District for [more than] 183 days or more during the tax year, whether or not the individual is domiciled in the District. 47 D.C. Code §1801.04(42).
The result is that the District has two bases it may assert to assess taxes: 1) whether the person is a domiciliary resident (whether the person is domiciled in the District, which takes into account the person’s physical presence, intent to be domiciled in the District that could be evidenced by a driver’s license, voting record, etc.) and 2) a statutory resident (simply owning a place of abode in the District.
It should be noted that, for statutory residency, temporary absences, like vacations, business travel, hospital and rehabilitation stays, are not subtracted from the 183-day threshold.
The District filed suit against an individual and an employer claiming that the individual was a statutory resident, wherein the D.C. Office of Tax and Revenue (“OTR”) took the position that the determination of statutory residency (and the District’s authority to tax) was a simple litmus test based upon the existence of a place of abode. D.C. Superior Court District of Columbia v. Saylor, Case No. 2021 CABSLD 001319 B.
This should start to bring into focus the inherent danger of the District imposing income or other taxes. A person who owns or rents a “place of abode” for more than 183 days in a year could be subject to DC taxation even if that person had not stepped a foot in the District. This is a vastly different scenario from most other states which couple a physical presence requirement before they will attempt to assert a tax.
Because there is no definition of “place of abode” in DC laws or regulations, the courts are saddled with how to define the term. Two considerations have had particular importance.
“Base of Operations”. Administrative Law Judges have reviewed the facts of each case to determine whether the residence is more or less permanent “base of operations” (a legally defined term), a principal abode, keeping it furnished, having utilities, to which an individual returns between vacations and work travel. Other factors which might be considered are similar to those associated with determining domiciliary residency, including where a driver’s license was issued, whether the individual has another property in a different state with factors indicating that he treats that property as his principal domicile as opposed to the D.C. unit.
“Unfettered Access”. A dwelling is more likely to be a “place of abode” if the owner has “unfettered access” to the unit. If an owned dwelling is leased out, it is far less likely to be a “place of abode” to which the person can easily return as a base of operations. Conversely, if individual rents an apartment on a longer term basis from another person or the employer provides a company-owned/leased unit to the person, that unit could constitute a “place of abode” and may be a trigger of taxation.
The administrative law judges are also mindful of a conflict between OTR’s rigid interpretation of statutory residency and the provisions under the Constitution’s Commerce Clause and, on at least one occasion, it was held that the interpretation had to be “rejected because it would inhibit interstate commerce and render the statute unconstitutional”. Bechtel v. Office of Tax and Revenue, Case No. 2016-OTR-0017. The judge further held that OTR’s position was untenable in that the result would be that “an individual who maintained a dwelling for their use in more than one state could be deemed to be a statutory resident of multiple states … [which would] deter individuals from buying or renting in more than one state, thereby impeding interstate economic activity”. See Bechtel MSJ at 22, n.95.
In an excellent article entitled “Pass/Fail: Evaluating the Test for D.C. Statutory Residency” appearing in “A Pinch of Salt” issued by Tax Analysis, t/a “Tax Notes”, Charles C. Kearns and Charles C. Capouet explore this matter in further depth.
Professionals guiding individuals who purchase dwellings or enter into long-term leases in the District should be mindful of the possibility of the District assessing income and other taxes, based solely upon the ownership of and access to the dwelling. No longer can one simply take solace in the fact that the individual is not actually present in the District for any period of time. Instead, there must be careful consideration of the factors and how to mitigate against an aggressive interpretation by the District taxing authority.