I sell and install floor coverings and cabinetry, collecting sales tax on everything — now I'm being assessed use tax too on the materials I installed. Is there any relief now that the law has changed?

Plain-English summary

A business that sells and installs floor coverings — tile, hardwood, carpeting — and cabinetry for residential and commercial customers throughout Virginia was audited for July 2020 through March 2021. Throughout the audit period, the Taxpayer treated itself as a retailer, collecting and remitting sales tax on its sales and installations of these materials. The auditor instead classified the business as a "dual operator" — part contractor, part retailer — and assessed use tax on the materials it had installed into real property without paying tax on them at the time of purchase.

A different dual-operator provision than the usual fabricator cases. Rather than the primary-purpose-rule regulation the Department applies to dual-role FABRICATORS (23 VAC 10-210-410 E, seen in companion rulings), this Taxpayer was analyzed under 23 VAC 10-210-410 B, which covers contractors who both install tangible personal property into realty and sell such property to customers for their own use. Under that provision, a dual-operator contractor is treated as a dealer that must register, and may buy materials tax-exempt under a resale certificate — UNLESS it knows, at the time of purchase, that the specific property will be used in a particular installation contract. If materials are later pulled from sales inventory for the contractor's own installation work, the contractor must then include the cost of that withdrawn property on its own return and pay the tax.

Why the assessment was correct. The Department found the auditor properly classified the Taxpayer as a contractor because the materials it purchased were used and consumed in Virginia installation jobs, becoming real property upon installation (citing P.D. 91-141, P.D. 93-23, and P.D. 00-158). As a contractor, the Taxpayer should have paid sales tax to its vendors (or accrued use tax directly) on those materials — instead, it erroneously collected sales tax from its own customers on the installed jobs, so the untaxed material purchases were correctly assessed as use tax exceptions.

The credit question — the same brand-new relief as companion rulings. The Taxpayer argued the result was inequitable, since it had already collected and remitted sales tax on the very same property now being assessed use tax. As in related rulings, the Department's historical policy has generally refused to credit erroneously collected sales tax against a use tax assessment (P.D. 07-135), with only narrow prior exceptions (P.D. 07-68, P.D. 09-177). But Virginia Code § 58.1-1812 C, effective July 1, 2024, now permits exactly this kind of one-time, first-offense credit when the same specific property was both erroneously taxed at sale and subject to use tax. Because this correction request predated the Department's implementing bulletin (VTB 24-3), the Department returned the case to field audit staff to determine the Taxpayer's eligibility and adjust the assessment accordingly, rather than deciding it here.

Going forward, the Taxpayer may continue buying materials under a resale certificate only when it doesn't yet know a specific piece of property is earmarked for a particular installation job — and must pay tax on anything it later withdraws from sales inventory for its own installation work. The one-time credit won't be available again in future audits.

What this means for you

Floor covering, cabinetry, and similar dual-purpose contractors

If you both sell materials at retail AND install your own work, you're a "dual operator" under 23 VAC 10-210-410 B — a different (and in some ways more forgiving) framework than the fabricator primary-purpose rule, since you can buy tax-exempt for resale as long as you don't yet know a specific piece of property is earmarked for a specific installation job.

Contractors who erroneously collected sales tax instead of paying use tax

Check whether Virginia's new one-time credit (Va. Code § 58.1-1812 C, effective July 1, 2024) applies to your situation, especially if your erroneous treatment tracked an earlier phase of Virginia law (like the pre-2017 retailer-treatment carve-out for certain installed items) that later changed.

Accountants and tax professionals

Distinguish between the two "dual operator" regulatory hooks in this corpus: 23 VAC 10-210-410 E's primary-purpose rule (for fabricators making their own products) versus 23 VAC 10-210-410 B's know-at-time-of-purchase test (for contractors who resell purchased materials). They lead to different documentation questions for your client.

Common questions

Q: I sell flooring and cabinetry retail, and also install my own work — which "dual operator" rule applies to me?
A: Likely 23 VAC 10-210-410 B, not the fabricator primary-purpose rule — you can buy materials tax-exempt for resale as long as you don't yet know, at the time of purchase, that a specific piece will go into a specific installation job.

Q: I already collected and remitted sales tax on materials that were later assessed use tax — can I get credit?
A: Possibly, under the new one-time credit in Va. Code § 58.1-1812 C (effective July 1, 2024), limited to your first offense and requiring proof the same specific property was both taxed and later assessed use tax.

Q: What happens when I pull inventory I bought tax-exempt for resale and use it in my own installation job instead?
A: You must include the cost of that withdrawn property on your own sales and use tax return and pay the tax at that point.

Q: Can I use this new credit again in a future audit?
A: No — it's limited to the first offense, and the Department has stated it won't be available again for the same taxpayer.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-610 A — contractor deemed to purchase tangible personal property for its own use in real property contracts
• 23 VAC 10-210-410 A — tangible personal property incorporated into real property is used/consumed by the contractor
• 23 VAC 10-210-410 B — a dual-operator contractor may buy exempt for resale only if it knows at purchase time the property will be used in a specific contract
• Va. Code § 58.1-1812 C — one-time credit for erroneously collected/remitted sales tax against a related use tax assessment, effective July 1, 2024

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-144

Original ruling text

December 18, 2024

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) as a result of an audit for the periods July 2020 through March 2021.

FACTS

The Taxpayer sells and installs floor coverings, including tile, hardwood, carpeting, and cabinetry to residential and commercial customers in Virginia. For sales and use tax purposes, the Taxpayer treated itself as a retailer and collected and remitted sales tax on its sales and installation of tangible personal property.

The Taxpayer was audited for the period at issue. Based on the Taxpayer’s operations, the auditor classified the business as a contractor that also made retail sales. As a result of the audit, the Taxpayer was assessed use tax on its purchases of tangible personal property that was installed into real property. The Taxpayer filed an application for correction contending that it was not aware of the requirement to pay use tax and that the assessments create double taxation because it also collected and remitted sales tax on the tangible personal property at issue.

DETERMINATION

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 audit findings, the Taxpayer was both a retailer of floor covering materials and supplies and a using and consuming contractor with regard to installing floor coverings during the audit period. Under these operating conditions, the Taxpayer would be considered a dual operator.

Dual Operator

Title 23 VAC 10-210-410 B addresses contractors who operate in a dual capacity of installing tangible personal property into realty and selling tangible personal property to customers for their own use or consumption. This regulation provides that applicable contractors are considered dealers and must obtain a Certificate of Registration. As a dealer, the contractor may purchase tangible personal property under a resale exemption certificate, unless it knows at the time of purchase that the property will be used or consumed in connection with a specific contract. Similarly, if the contractor removes tangible personal property from its sales inventory for use in the performance of any contract, it must include the cost of the tangible personal property on its sales and use tax return and pay the tax.

The Taxpayer incorrectly operated as a retailer rather than a dual role contractor during the audit period. The auditor properly classified the Taxpayer as a contractor when the tangible personal property purchased was used and consumed in Virginia jobs and became real property upon installation. See Public Document (P.D.) 91-141 (7/31/1991), P.D. 93-23 (2/9/1993), and 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 to the Department 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 that 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.

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 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.

Since the issuance of these determinations, a number of changes have impacted the contractor industry in Virginia. Prior to July 1, 2017, contractors selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings, cabinets, kitchen equipment, window air conditioning units, or other like or comparable items were required to purchase such items for resale tax exempt and collect sales tax from their customers. In 2017, the provision of Virginia Code § 58.1-610 that imposed this requirement was repealed. See Virginia Tax Bulletin (VTB) 17-8, published as P.D. 17-139 (6/29/2017). The Taxpayer in this case was directly impacted by this legislative change.

Law Change

Effective July 1, 2024, Virginia Code § 58.1-1812 C, as enacted 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. VTB 24-3, issued as P.D. 24-64 (7/1/2024), provides important information concerning the new law.

Under the law change set forth in 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 contractor has previously applied for and received such a credit, or in the case of a false or fraudulent action by the contractor 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 details 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 both a retailer and 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 it 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 may continue to purchase tangible personal property under a resale exemption certificate unless it knows at the time of purchase that the property will be used or consumed in connection with a specific contract. In addition, when it removes materials from its sales inventory for use in the performance of any contract, the Taxpayer must include the cost of such materials on its sales and use tax return and pay the tax. A credit for erroneously collected and remitted retail sales tax 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 and Legal Affairs, Sales Tax Adjudication, at () * 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

16-107

17-8

20-149

21-63

22-56

24-3