I ran my security-installation business as a retailer for years and charged my customers sales tax, but my auditor says I should have paid use tax as a contractor instead -- do I now owe use tax ON TOP OF the sales tax I already collected and paid over?

Plain-English summary

A business that sells and installs security gates, access control systems, and security camera systems was audited for April 2016 through May 2020. It correctly treated some transactions -- like furnishing unmonitored camera systems without installation -- as taxable retail sales. But for jobs like installing security gate systems, the auditor found the business had purchased materials without paying sales or use tax, because it had (incorrectly) treated those transactions the same way: as retail sales, charging its customers sales tax instead. The taxpayer argued this shouldn't also generate a use tax bill on the same property -- that would mean paying tax twice on the same materials. This ruling explains why the underlying assessment was still correct, and how a brand-new law gives the taxpayer a real path to relief anyway.

Why installing security gates makes you a contractor, not a retailer. Va. Code § 58.1-610 A is Virginia's core "consuming contractor" rule: anyone who contracts to install tangible personal property into real estate or fixtures is deemed to have purchased that property for its own use or consumption -- meaning the SELLING dealer must collect tax from the CONTRACTOR at the point of purchase, not the other way around. 23 VAC 10-210-410 A reinforces this: property that loses its identity as personal property and becomes real property upon installation is deemed used/consumed by the contractor, never resold. Because the security gate materials became part of the customer's real property once installed, the taxpayer was legally a contractor for those jobs (citing P.D. 00-158) -- required to pay sales tax to its OWN vendors or accrue and remit use tax on its purchases, not to collect sales tax from its customers as if reselling the property.

The old rule: erroneously collected sales tax generally didn't offset a contractor's use tax bill. The taxpayer argued that being hit with use tax on property for which it ALSO collected and remitted sales tax from customers meant Virginia collected more tax than the law allows. Historically, the Department's answer to this argument was largely no: under 23 VAC 10-210-3040, a contractor is only entitled to a sales tax REFUND if it can show the erroneously collected tax either wasn't passed on to the customer, or was collected and later refunded to the customer -- not simply because tax was paid somewhere in the chain. In P.D. 07-135 (9/4/2007), the Department explained why: allowing a credit merely because SOME tax was collected would let contractors fund their own use tax liability with their customers' payments, and would let them avoid accountability for violating § 58.1-610 in the first place. That ruling expressly overruled an earlier, more taxpayer-favorable case (P.D. 03-87), and P.D. 09-177 (11/19/2009) reaffirmed the stricter rule -- carving out only a narrow exception where customers had formally assigned their refund rights to the contractor. (Separately, the Department has allowed credit in cases where a dealer simply forgot to charge sales tax but the customer independently remitted use tax (P.D. 07-68), or where a contractor mislabeled its invoice charge as "estimated use tax" while still properly remitting the actual use tax owed (P.D. 22-56) -- narrow fact patterns, not a general credit rule.)

The law changed on July 1, 2024. The General Assembly amended Va. Code § 58.1-1812 C (2024 Acts of Assembly, Chapters 113 and 128) to permit exactly the kind of relief this taxpayer wanted -- but only going forward and only once. When a contractor has erroneously charged, collected, and remitted sales tax on installed-and-annexed real property that's ALSO properly subject to use tax, the contractor can now get a one-time credit for the erroneously remitted sales tax against the use tax assessment on that SAME property. Key limits, per the Department's implementing guidance (Virginia Tax Bulletin 24-3, P.D. 24-64):

• The credit is limited to the use tax assessed on the contractor's OWN purchase transactions, and is available for the first offense only (generally, the first time the issue surfaces on audit).
• The contractor must clearly show the SAME specific property was both erroneously sales-taxed and properly use-tax-assessed -- matched purchase and sales records are required (auditors will work with contractors on alternatives if complete records aren't available).
• No credit if the contractor already received this credit before, or if there was fraud or willful evasion.
• For audits completed on or after July 1, 2024, field audit staff determine the credit as part of the audit. For assessments made BEFORE July 1, 2024 (like this one), the contractor must file Form OIC B-2 (an offer in compromise) with matched records to initiate the process.
• The credit period is extended forward to cover all periods where the contractor kept erroneously collecting sales tax -- up to when it fixed its accounting practices, or the end of the month after the revised audit is completed, whichever comes first.
• A contractor can't claim BOTH this credit and a separate sales tax refund on the same transaction -- pick one path.

What happens to this taxpayer's case. Because this correction request was filed BEFORE the Department issued VTB 24-3, the Department is sending the case back to field audit staff to determine the taxpayer's eligibility for the one-time credit and adjust the assessment accordingly, extending the credit period as described above. A revised audit report and bill will follow, with the usual 30-day window to pay before further interest accrues. Going forward, the taxpayer is instructed to actually pay sales tax to its vendors or accrue/remit use tax directly on materials it consumes in future real property contracts -- because this credit is a one-time fix, not a standing rule, and won't be available again in future audits.

What this means for you

Installers of security systems, gates, HVAC, flooring, cabinetry, or similar equipment attached to real property

If you furnish AND install equipment that becomes part of the customer's real property, you're very likely a consuming contractor under § 58.1-610 A -- meaning YOU owe the tax on your own material purchases, not your customer. Collecting sales tax from customers on these jobs, instead of paying/accruing tax on your own purchases, is the exact mistake this taxpayer made.

Contractors who discover they've been erroneously collecting sales tax instead of paying use tax

You may now have real relief under the new one-time credit (Va. Code § 58.1-1812 C, effective July 1, 2024) -- but it's available only ONCE, only for the first offense identified on audit, and only if you can match the specific property across your purchase and sales records. For assessments predating VTB 24-3, you'll need to file Form OIC B-2 to start the process.

Anyone who already used this credit once, or who acted fraudulently

Don't expect it a second time -- the statute and VTB 24-3 both make clear this is a one-time correction, not an ongoing offset for repeat errors.

Businesses fixing this mistake going forward

Once you're aware of the correct contractor treatment, start paying sales tax to your vendors or accruing/remitting use tax directly. Continuing to erroneously collect sales tax after the fact won't be excused by this credit in a future audit.

Common questions

Q: I install equipment that becomes part of my customer's building -- am I a retailer or a contractor for Virginia sales tax purposes?
A: Almost certainly a contractor. Under Va. Code § 58.1-610 A, furnishing and installing tangible personal property that becomes real property makes you the ultimate consumer of that property -- you owe the tax on your purchase, not your customer on the sale.

Q: I collected sales tax from my customers for years by mistake instead of paying use tax myself -- do I now owe use tax on top of the sales tax I already remitted?
A: The use tax assessment itself is likely correct, but Virginia's new one-time credit (effective July 1, 2024) may let you offset that assessment with the erroneously collected sales tax on the SAME property -- available only once, for the first offense.

Q: My assessment was issued before July 1, 2024 -- can I still use the new credit?
A: Yes, but you'll need to file Form OIC B-2 (an offer in compromise) with matched purchase and sales records to initiate the process, rather than having it applied automatically during the audit.

Q: Can I get both this credit and a refund of the sales tax I erroneously collected?
A: No -- you must choose one path per transaction, not both.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-610 A -- a real property contractor is deemed the ultimate consumer of tangible personal property it furnishes and installs; the selling dealer must collect tax on the sale to the contractor
• 23 VAC 10-210-410 A -- tangible personal property that loses its identity and becomes real property upon installation is deemed used/consumed by the contractor, not resold
• 23 VAC 10-210-3040 -- a contractor may get a sales tax refund only by showing the erroneously collected tax wasn't passed to the customer, or was collected and then refunded to the customer
• Va. Code § 58.1-1812 C, as amended effective July 1, 2024 (2024 Acts of Assembly, Chapters 113 and 128) -- permits a one-time credit of erroneously collected-and-remitted sales tax against a use tax assessment on the same property, first-offense only
• Virginia Tax Bulletin 24-3 / P.D. 24-64 (7/1/2024) -- implementing guidance for the new one-time credit: matched purchase/sales records required, Form OIC B-2 for pre-7/1/2024 assessments, no double-dipping with a sales tax refund

Authorities the Department relied on (described here, not linked): P.D. 00-158 (8/25/2000) (installed materials that become real property are consumed by the contractor); P.D. 07-135 (9/4/2007) (erroneously collected sales tax generally doesn't offset a contractor's use tax liability; overruling P.D. 03-87 (11/12/2003)); P.D. 09-177 (11/19/2009) (reaffirming P.D. 07-135, with a narrow exception for assigned customer refund rights); P.D. 07-68 (5/10/2007) and P.D. 22-56 (3/30/2022) (narrow prior credit allowances on distinct facts). This is one of several companion rulings issued around the same date addressing the new § 58.1-1812 C credit (see also the already-enriched P.D. 24-123, P.D. 24-144, P.D. 24-147, and P.D. 25-8) -- this ruling gives the fullest account of the credit's legislative history and VTB 24-3 mechanics among them.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-111

Original ruling text

November 14, 2024

Re: 1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of **Inc., *** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period April 2016 through May 2020.

FACTS

The Taxpayer, a seller and installer of security gates, access control systems, and security camera systems, was audited for the period at issue. The Taxpayer correctly treated certain transactions, such as the furnishing of unmonitored security camera systems, as taxable retail sales. However, the auditor found untaxed purchases of tangible personal property used by the Taxpayer to install its products on real property for transactions such as the installation of security gate systems. The Taxpayer filed an application for correction contending the use tax was assessed on the same tangible personal property used in transactions for which retail sales tax was charged, collected, and remitted.

DETERMINATION

Contractors

Generally, real property contractors must comply with Virginia Code § 58.1-610 A, which provides:

Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.

The regulation that interprets this provision, Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A states:

Tangible personal property incorporated in real property construction that loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor.

Based on the facts in this case, the Taxpayer incorrectly operated as a retailer during the audit period related to transactions where it was a real property contractor. The auditor properly classified the Taxpayer as a contractor because the tangible personal property purchased by the Taxpayer was used and consumed in Virginia jobs and became real property upon installation. See Public Document (P.D.) 00-158 (8/25/2000). As a contractor, the Taxpayer was required to pay the sales tax to its vendors or accrue and remit the use tax directly on its purchases of tangible personal property consumed in its real property contracts. Instead, the Taxpayer erroneously treated its transactions as retail sales and charged the sales tax to its customers. Consequently, material purchases for which the Taxpayer did not pay the sales tax were properly listed as exceptions in the audit.

Credit for Improperly Charged Sales Tax

The Taxpayer argues the Department’s assessment of use tax and interest on tangible personal property for which the Taxpayer collected and remitted sales tax leads to an inequitable result. Specifically, the Taxpayer contends that applying both the sales tax and use tax to tangible personal property sold to its customers leads to a result under which the Commonwealth receives more tax than permitted by the sales and use tax statutes.

Contractor Rules

When any contractor erroneously collects sales tax from its customers, it does not eliminate the contractor’s responsibility to remit use tax on the property being installed. See Title 23 VAC 10-210-410. Under audit, if it was determined that use tax should have been paid rather than the erroneously remitted sales tax, the contractor would receive an assessment for the unpaid use tax. Because the transaction on which the sales tax was collected is a separate transaction, credit has not generally been granted against the use tax assessment. The contractor is generally entitled to a refund of the sales tax only if he can show that the tax erroneously collected was paid by him and not passed on to the customer or that the tax was collected from the customer and subsequently refunded to the customer. See Title 23 VAC 10-210-3040.

The Department’s current policy only permits a credit in limited circumstances. The Department has allowed credit in a case involving a dealer that incorrectly failed to charge sales tax, but the customer remitted use tax for the transaction. See P.D. 07-68 (5/10/2007). Similarly, in P.D. 22-56 (3/30/2022), the Department allowed credit where the contractor included "estimated use tax" on its invoice, essentially charging sales tax under the wrong name, but remitted the use tax for the property consumed in the transactions on its returns.

In P.D. 07-135 (9/4/2007), the Department reasoned that allowing a credit for erroneously collected sales tax would (1) authorize contractors to pay their use tax liability with their customer's sales tax payments, and (2) allow contractors to avoid financial responsibility for violating the requirements of Virginia Code § 58.1-610. In other words, the Department does not allow a credit based merely on the fact that the tax has been paid. Further P.D. 07-135 overruled earlier cases, including P.D. 03-87 (11/12/2003), in which a contractor that incorrectly collected retail sales and use tax from Virginia customers and had not issued refunds to such customers was permitted a credit of taxes collected and remitted against use taxes assessed in the audit. In P.D. 09-177 (11/19/2009), the Department upheld the policy established in P.D. 07-135, but permitted a credit for tangible personal property included in transactions for which the customers had assigned the rights to refunds of erroneously paid sales tax to the consuming contractor.

Law Change

Effective July 1, 2024, Virginia Code § 58.1-1812 C, as amended by the General Assembly (2024 Acts of Assembly , Chapters 113 and 128), permits the Department to allow erroneously collected retail sales tax collected by a contractor from its customer and remitted to the Department to be credited against a use tax assessment made against such contractor regarding the transaction. Virginia Tax Bulletin (VTB) 24-3, issued as P.D. 24-64 (7/1/2024), provides important information concerning the new law.

Under Virginia Code § 58.1-1812 C, when a contractor has erroneously charged, collected, and remitted sales tax on transactions in which tangible personal property was installed and annexed into real property and the same tangible personal property is rightfully subject to a use tax assessment, a one-time credit for the erroneously remitted sales tax will be permitted against the use tax assessment. The credit will be limited to the use tax assessed on the contractor’s purchase transaction of tangible personal property and will be allowed for the first offense only. In practical terms, the first offense would be the first time the issue is identified on audit.

In order for a credit to be granted, a contractor must clearly show that the property included in transactions for which sales tax was erroneously collected and remitted was the same specific property that was incorporated into realty and subject to the use tax. However, credit will not be given in any case where the taxpayer has previously applied for and received such a credit, or in the case of a false or fraudulent action by the taxpayer with the intent to evade the proper tax.

For audits completed on or after July 1, 2024, audit staff will be required to determine the amount of the credit, if any. Auditors will need to have access to a contractor’s complete purchase and sales records in order to verify credit for tangible personal property for which use tax should have been accrued. If complete records are not available, auditors will work with contractors to find alternative means to verify a credit. In addition, auditors will extend the application of the credit forward in order to cover all periods in which the contractor erroneously collected sales tax. The credit is limited to the applicable use tax liability for the first offense.

For assessments made before July 1, 2024, a contractor will be required to complete and submit an offer in compromise request on Form OIC B-2 to initiate the process. A contractor will need to provide matched purchase and sales records as well as sales and use tax return detail to document its eligibility. A review of the offer in compromise may be conducted by office staff or referred to field audit staff depending on the nature and volume of the information provided.

In the alternative, contractors can receive a refund of any erroneous retail sales tax payments remitted if they can affirmatively show that the tax has been refunded to the Virginia customer or credited to their account. The contractor will need to follow the Retail Sales and Use Tax Refund Claim Procedures available on the Department’s website. A contractor will not be eligible for both the credit under Virginia Code § 58.1-1812 C and a sales tax refund on the same transaction.

CONCLUSION

As determined by the auditor, the Taxpayer was a consuming contractor that erroneously charged, collected, and remitted sales tax on its transactions that included installation into real property during the audit period at issue. Under VTB 24-3, the Taxpayer would need to file Form OIC B-2 to initiate a claim for a credit toward its audit assessment or follow the procedures for claiming a refund for taxes erroneously collected from its customers. Because this application for correction was filed before the issuance of VTB 24-3 and requests a credit in the manner permitted under Virginia Code § 58.1-1812 C, the audit will be returned to the appropriate field audit staff to review the Taxpayer’s eligibility for the one-time credit and adjust the assessment accordingly.

The credit will be extended to periods subsequent to the audit until the date at which the Taxpayer changed its accounting system to comply with Virginia retail sales and use tax requirements or the last day of the month following the month in which the revised audit is completed, whichever is earlier. The extension does not constitute an expansion of the audit period and is limited to the credit for erroneous collection of tax. A contractor and the auditor may agree to bring the entire audit forward to correspond with the extension period.

After the revision of the audit is complete, the Taxpayer will be issued a revised audit report and revised bill, if applicable, with interest accrued to date. No further interest will accrue provided the outstanding liability is paid within 30 days of the date of the updated bill.

Going forward, the Taxpayer is hereby instructed to pay sales tax to its vendors or accrue and remit the use tax directly to the Department on its purchases of tangible personal property consumed in its real property contracts. A credit for erroneously collected and remitted retail sales tax to will not be available in future audits.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents and tax bulletin cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If there are any questions regarding this determination, please contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at (804) , or via email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Related Documents

91-141

93-23

00-158

03-87

07-68

07-135

09-177

22-56

24-3