I install and service fire alarm and sprinkler systems and mistakenly charged my customers sales tax instead of paying use tax myself -- can I get credit for the sales tax I already collected and remitted, against the use tax the Department now says I owe?

Plain-English summary

A business that installs, maintains, and inspects fire alarms, fire sprinkler systems, fire extinguishers, kitchen hood/ventilation systems, and fire suppression systems was audited for July 2015 through June 2018 and assessed use tax on untaxed purchases of the tangible personal property it consumed while performing its installation contracts.

Wrong role: a contractor acting like a retailer. Under Va. Code § 58.1-610 A and 23 VAC 10-210-410 A, a business that furnishes and installs tangible personal property into real estate -- and whose materials lose their separate identity once installed, becoming part of the building -- is deemed a real property contractor, the "ultimate consumer" of that property. A contractor owes tax on its OWN purchases (either paying sales tax to its vendor or accruing use tax directly), and should NOT charge its customers sales tax on the installation job. This taxpayer did the opposite: it treated its installation contracts as retail sales, charging, collecting, and remitting sales tax from customers, while never paying tax on its own material purchases. The auditor correctly reclassified the transactions and assessed use tax on the untaxed purchases.

Relief through Virginia's new one-time credit. This ruling is a close companion to this corpus's already-enriched P.D. 24-111 -- same core legal issue (a fire/security-systems-style contractor mistakenly acting as a retailer), same result. Effective July 1, 2024, Va. Code § 58.1-1812 C allows a contractor a ONE-TIME credit for sales tax it erroneously charged, collected, and remitted, applied against a matching use tax assessment on the SAME specific property -- available only for a first offense, and only if the contractor can match the specific property across its purchase and sales records. Because this taxpayer's correction request was filed before the Department issued its implementing guidance (Virginia Tax Bulletin 24-3), the case is being sent back to field audit staff to determine the taxpayer's eligibility and adjust the assessment. The credit period is extended forward to cover the time until the taxpayer corrects its accounting practices (or shortly after the revised audit is completed, whichever comes first).

Going forward. The taxpayer is instructed to pay sales tax to its vendors, or accrue and remit use tax directly, on materials consumed in its real property installation contracts from now on -- this one-time credit is a first-offense fix, not a standing rule, and won't be available again in future audits.

What this means for you

Fire-safety, security, HVAC, or similar systems installers

If your equipment becomes part of the building once installed (loses its identity as separate personal property), you're very likely a real property CONTRACTOR under Virginia law -- meaning you owe the tax on your own material purchases, not your customer on the finished job. Charging customers sales tax instead is a common, costly mistake to reverse.

Contractors who discover they've been collecting 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) can offset your use tax exposure -- but remember it only covers a FIRST offense, requires matched purchase-and-sales records for the specific property, and (for assessments predating VTB 24-3) requires filing Form OIC B-2 to start the process.

Businesses correcting their practices after an audit

Once you've used this one-time credit, fix your systems going forward -- pay tax to your vendors or accrue use tax directly. The credit will not be available on a second offense.

Common questions

Q: I install equipment that becomes part of a building -- am I a retailer or a contractor for Virginia tax purposes?
A: If the property loses its identity as personal property once installed (becoming part of the real estate), you're a contractor -- the "ultimate consumer" who owes the tax on your own purchases, not a retailer who charges customers sales tax on the job.

Q: I mistakenly charged and collected sales tax from customers instead of paying use tax myself -- can I get credit for that against my use tax assessment?
A: Possibly, for the first offense only, under Virginia's new one-time credit (Va. Code § 58.1-1812 C, effective July 1, 2024) -- you'll need to match the specific property across your purchase and sales records.

Q: My correction request was filed before Virginia issued its guidance on the new credit -- what happens to my case?
A: It gets sent back to field audit staff (or, for older assessments, requires filing Form OIC B-2) to determine your eligibility and adjust the assessment accordingly.

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 installs into realty
• 23 VAC 10-210-410 A -- tangible personal property that loses its identity and becomes real property is used/consumed by the contractor, not resold
• Va. Code § 58.1-1812 C -- effective July 1, 2024; one-time credit for erroneously collected-and-remitted sales tax against a matching use tax assessment

Prior rulings and guidance the Department relied on (described here, not linked): P.D. 91-141, P.D. 93-23, and P.D. 00-158 (contractor-vs-retailer classification for installed property); P.D. 03-87 (an earlier, now-overruled case that allowed a similar credit); P.D. 07-68 and P.D. 22-56 (narrow existing credit circumstances); P.D. 07-135 (overruling P.D. 03-87 and explaining why erroneous-collection credits generally aren't allowed); P.D. 09-177 (a narrow assigned-refund-rights exception); Virginia Tax Bulletin 24-3 / P.D. 24-64 (7/1/2024) (implementing guidance for the new one-time credit). This ruling is a close companion to this corpus's already-enriched P.D. 24-111, which covers the same one-time credit and legislative history in more depth for a different contractor (security gates, access control, and cameras).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-97

Original ruling text

September 25, 2024

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the period July 2015 through June 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a provider of installation, maintenance, and inspection services for fire alarms, fire sprinkler systems, fire extinguishers, kitchen hood and ventilation systems, and fire suppression systems, 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:

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. 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.

Existing 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 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 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. Virginia Tax Bulletin (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 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 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 , or via email at **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/2216.F

Related Documents

91-141

93-23

00-158

03-87

07-68

07-135

09-177

22-56

24-3