I install garage doors and collected sales tax from my customers the whole time — now I'm assessed use tax on the same materials. Is there any relief?

Plain-English summary

A garage door installer was audited for March 2019 through February 2022. The auditor assessed consumer use tax on the Taxpayer's untaxed purchases of tangible personal property that it consumed while performing contracted installation services in Virginia. The Taxpayer filed a correction request, arguing it was being assessed use tax on materials for which it had already charged, collected, and remitted sales tax from its own customers.

Contractor classification. Under Virginia Code § 58.1-610 A and 23 VAC 10-210-410 A, a business that contracts to install tangible personal property into real estate is generally deemed to have purchased those materials for its OWN use and consumption — meaning it owes sales tax on the materials, not a separately collected tax on the installed job (citing P.D. 91-141, P.D. 93-23, and P.D. 00-158). The Department confirmed the auditor correctly classified the Taxpayer as a contractor, since its materials became real property upon installation. As a contractor, the Taxpayer should have paid sales tax to its vendors or accrued use tax directly, rather than collecting sales tax from its own customers — so its untaxed material purchases were properly listed as audit exceptions.

The credit question. Historically, the Department has generally refused to credit a contractor's erroneously collected-and-remitted sales tax against a related use tax assessment, treating the two as separate transactions (23 VAC 10-210-3040; P.D. 07-135, overruling a more permissive earlier P.D. 03-87), with only narrow exceptions (P.D. 07-68, P.D. 09-177). That changed with Virginia Code § 58.1-1812 C, effective July 1, 2024: it now permits a ONE-TIME credit, limited to a contractor's first offense, when the SAME specific property was both erroneously charged sales tax and is subject to a related use tax assessment. Virginia Tax Bulletin 24-3 (P.D. 24-64) implements the change; for assessments made before July 1, 2024 — like this one — a contractor must file Form OIC B-2 with matched purchase and sales records to claim the credit.

Outcome: sent back for review. Because this Taxpayer's correction request predated VTB 24-3 but requested credit consistent with the new § 58.1-1812 C, the Department returned the case to field audit staff to determine the Taxpayer's eligibility and adjust the assessment if warranted, rather than deciding it in this ruling. Any credit would extend forward until the Taxpayer's accounting practices were fixed or the revised audit was completed, whichever came first. Going forward, the Taxpayer should pay sales tax to its vendors (or accrue and remit use tax directly) rather than collecting sales tax from customers — this one-time credit will not be available again in future audits.

What this means for you

Garage door and similar installation contractors

If you've been collecting sales tax from customers on installed materials rather than paying tax on those materials up front, you may face the same use tax assessment this taxpayer did on audit — but you may also be able to seek the same new one-time credit if you can show the same specific property was both taxed at sale and later assessed use tax.

Any contractor with a pending or recent use tax assessment

Don't assume an assessment tied to erroneously collected sales tax is final. Virginia Code § 58.1-1812 C (effective July 1, 2024) is new law that reverses the Department's decades-old no-credit policy — check whether your situation qualifies, especially for a first offense.

Accountants and tax professionals

For assessments made before July 1, 2024, remember the credit isn't automatic on audit — your client needs to file Form OIC B-2 with matched purchase and sales records to be considered.

Common questions

Q: I'm a contractor who collected sales tax on installed materials instead of paying use tax — what happens now?
A: If audited, you'll likely face a use tax assessment on those materials, since contractors are deemed to have purchased materials for their own use. But you may also qualify for Virginia's new one-time credit for the erroneously collected sales tax.

Q: How do I claim the new one-time credit if my assessment predates July 1, 2024?
A: File Form OIC B-2 (an offer in compromise) with matched purchase and sales records and sales/use tax return detail.

Q: Can I get this credit more than once?
A: No — it's limited to your first offense, and the Department has stated it won't be available again in future audits.

Q: Does the credit apply automatically once I mention the new law?
A: No — eligibility requires a case-by-case review by field audit staff, verifying that the same specific property was both charged sales tax and subject to the use tax assessment.

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
• 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. 24-146

Original ruling text

December 18, 2024

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period March 2019 through February 2022.

FACTS

The Taxpayer, an installer of garage doors, was audited for the period at issue. As a result of the Department’s audit, the Taxpayer was assessed consumer use tax on untaxed purchases of tangible personal property consumed during the provision of contracted services in Virginia. The Taxpayer filed an application for correction, contending that it was assessed use tax on tangible personal property provided in transactions for which it charged, collected, and remitted sales tax from its customers.

DETERMINATION

Contractors

Generally, real property contractors must comply with Virginia Code § 58.1-610 A, which provides “[a]ny 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.”

Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A adds “[t]angible 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. The auditor properly classified the Taxpayer as a contractor because the tangible personal property purchased by the Taxpayer was used and consumed in work performed in Virginia 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 on its purchases of tangible personal property consumed in its real property contracts. Instead, the Taxpayer erroneously treated the relevant 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.

Historical Policy

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 as tax and subsequently refunded to the customer. See Title 23 VAC 10-210-3040.

The existing policy only permitted 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 customers’ 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 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 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 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 (Business Offer In Compromise: Penalty Waiver/Doubtful Liability Form) 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, which purchased and consumed tangible personal property in its real property installation contracts, erroneously charged, collected, and remitted sales tax on these contracts during the audit period. 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 is complete, an updated audit report and an adjusted bill, if applicable, with interest accrued to date will be issued. 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 must 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 and Legislative Affairs, Tax Adjudication and Resolution Division, 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

22-56

24-3