I paid sales tax when I bought HVAC systems that were installed into my building — wasn't that really a nontaxable contractor job, and can I get the tax refunded?

Plain-English summary

A business bought HVAC equipment and supplies from a vendor between September 2016 and May 2018, paid sales tax on the invoices, and later asked the Department to refund that tax. Its theory: the vendor really sold installed HVAC systems — a real-property contracting job — and a contractor is the consumer of what it installs (owing use tax on its own costs), so the buyer should never have been charged sales tax. The Department denied the refund, and the Deputy Tax Commissioner upheld the denial on appeal under Va. Code § 58.1-1821.

The presumption and the paper. Every sale of tangible personal property is presumed taxable until the contrary is established (Va. Code § 58.1-623), and the sales tax is a transactional tax: each transaction is judged on the documents that support it (P.D. 92-36). Here, the only transactional documents were the vendor's invoices — materials and tax, with no service line items — and the buyer could produce no contract or agreement making the vendor responsible for installation. The auditor found a third-party contractor actually installed the systems.

How the contractor rules actually run. A business that contracts to install property into real estate is deemed the user/consumer of everything it uses in the job (§ 58.1-610), and installed HVAC generally becomes real property (P.D. 12-19, 17-157, 23-8). In a chain of owner, general/prime contractor, and subcontractor, the consumer is generally the contractor that performs the installation (23 VAC 10-210-410 A; P.D. 99-118, 20-92). Had the vendor acted as a prime contractor with the installer as its sub, the installer would have been the taxable consumer. But the vendor behaved as a retailer — it charged, collected, and remitted sales tax — which made the deal a taxable retail sale of equipment to the buyer, who then furnished it to the installing contractor. A consuming contractor picks up use tax on customer-purchased materials only when the customer is exempt from sales tax (typically an exempt organization — P.D. 04-207, 05-159); this buyer wasn't one. And the tax is in any event the legal debt of the purchaser (§ 58.1-625 A; United States v. Forst), so Virginia was entitled to the tax the vendor collected — the buyer's later emails with the vendor saying the vendor handled installation were "post factum" communications, not transactional evidence (§ 58.1-102, § 58.1-633 A).

The right way to get money back. The ruling closes by restating Virginia's refund procedure: a dealer that collects tax on an exempt or nontaxable transaction must remit it to the Department unless it refunds or credits the customer (§ 58.1-625 C), and under the Department's refund-claim Procedures the dealer must refund erroneously collected tax directly to the customer on request except in three situations — the dealer believes the tax was proper, the dealer is out of business, or the refund would cause the dealer undue financial hardship. The onus sits with the dealer because it best understands and can document its own sales — which is exactly why this customer-direct claim, built on conflicting and imprecise paperwork, "highlights the difficulty of a consumer applying directly to the Department" and could not be granted.

What this means for you

Businesses buying equipment that gets installed

How the deal is papered decides the tax. If you want contractor treatment (no sales tax charged to you), the contract must show the seller is responsible for furnishing and installing — one document, sale-plus-installation. If the seller invoices you for equipment plus sales tax and someone else installs it, you have bought tangible personal property at retail, and after-the-fact letters from the seller won't change it.

Vendors and contractors

Pick a lane per transaction and document it: retailer (charge sales tax on the sale) or consuming contractor (pay tax on your costs, charge no tax to the customer). A vendor that charges, collects, and remits sales tax has defined the transaction as a retail sale — for itself and for its customer.

Anyone seeking a Virginia sales-tax refund

Start with the dealer, not the Department: the dealer must refund erroneously collected tax on request unless it believes the tax was proper, is defunct, or faces undue hardship. Bring transactional proof — contracts and invoices from the time of the deal — because the Department analyzes each transaction on its own documents.

Common questions

Q: Installed HVAC becomes part of the building — doesn't that make the sale nontaxable automatically?
A: No. It depends on who contracted to install. If the seller furnishes and installs, the seller is a consuming contractor and shouldn't charge you sales tax. If the seller only sells the equipment and a third party installs it, the sale to you is a taxable retail sale — as the invoices showed here.

Q: The vendor later confirmed in writing that it was responsible for installation. Why didn't that count?
A: The sales tax is transactional: each transaction is judged on the documents supporting it at the time — contracts, agreements, invoices. The invoices showed materials and tax with no services, and no contemporaneous contract was produced; later communications are not transactional documentation.

Q: When can a contractor owe the use tax even though the customer bought the materials?
A: Typically only when the customer is exempt from sales tax (for example, an exempt organization). Otherwise the customer's purchase of the materials is itself the taxable retail sale, and the tax is the purchaser's legal debt.

Q: What are the three situations in which a dealer may refuse a customer refund request?
A: Under the Department's refund-claim procedures: (1) the dealer believes the transaction was properly taxable, (2) the dealer is no longer in business, or (3) refunding would cause the dealer undue financial hardship. Otherwise the dealer must refund erroneously collected tax directly to the customer.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-1821 — administrative appeal (application for correction) to the Tax Commissioner
• Va. Code § 58.1-623 — sales presumed taxable until the contrary is established
• Va. Code § 58.1-610 — real-property contractors are the users/consumers of what they install
• Va. Code § 58.1-625 A, C — the tax is the purchaser's legal debt; dealer duties for erroneously collected tax
• Va. Code § 58.1-102, § 58.1-633 A — record-retention and dealer recordkeeping requirements
• Va. Code § 58.1-603 — imposition of the sales tax on retail sales
• 23 VAC 10-210-410 A, B — contractor/subcontractor consumption rules; dual-role contractors

Authorities the Department relied on (described here, not linked): United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978) (the tax is the purchaser's legal debt); P.D. 92-36 (each transaction analyzed individually on its documents); P.D. 12-19, 17-157, and 23-8 (installed HVAC becomes real property); P.D. 99-118 and 20-92 (the installing contractor is the consumer in multi-tier jobs); P.D. 04-207 and 05-159 (contractor use tax where the purchasing customer is exempt). The letter is signed by the Deputy Tax Commissioner under a delegation of authority for matters where the Tax Commissioner may have a conflict of interest, reproduced at the end of the ruling text.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-52

Original ruling text

April 23, 2025

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

Dear *:

This will respond to your letter in which you protest the Department’s denial of a retail sales and use tax refund for the periods September 2016 through May 2018 filed on behalf of * (the “Taxpayer”).

FACTS

The Taxpayer requested a refund of sales tax on transactions it believes were exempt from tax. Specifically, the Taxpayer purchased heating, ventilation, and air conditioning (HVAC) equipment and supplies from * (the “Vendor”) and the Vendor charged sales tax on the transactions. The Taxpayer only provided invoices from the Vendor, but was unable to provide any contracts substantiating the provision of installation services.

Based on the information available, the Department’s auditor concluded that a third-party contractor installed the HVAC systems that were purchased from the Vendor and that sales tax was properly charged on the transactions. Accordingly, the auditor denied the Taxpayer’s refund request. The Taxpayer filed an application for correction, contending that the transactions with the Vendor were for the purchase and installation of HVAC systems and should not have been subject to sales tax.

ANALYSIS

Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Thus, it is incumbent on the consumer making the claim to prove that a dealer erroneously charged and collected tax on a transaction. The Taxpayer asserts that the Vendor was operating as a contractor with regard to the transactions at issue.

Contracting

For retail sales and use tax purposes, Virginia Code § 58.1-610 provides that businesses that contract to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon are deemed to have purchased all tangible personal property for use or consumption in the performance of such contract. Title 23 of the Virginia Administrative Code (VAC) 10-210-410 B provides that a consuming contractor who also sells tangible personal property at retail must obtain a certificate of registration and may purchase tangible personal property under a resale certificate if it knows at the time of purchase that the property will be resold. The sale and installation of the HVAC systems is generally considered to transform otherwise tangible personal property into real property. See Public Document (P.D.) 12-19 (3/5/2012), P.D. 17-157 (9/8/2017), and P.D. 23-8 (1/18/2023).

The Department’s auditor found that a third-party contractor installed the HVAC systems at issue instead of the Vendor. The information available indicated that the Vendor did not perform the installation services. Because the Vendor acted as a retailer by charging the Taxpayer sales tax, the auditor concluded that the transactions between Taxpayer and the Vendor for the sale of HVAC equipment and supplies were taxable sales of tangible personal property. The Taxpayer counters that the Vendor installed the equipment and therefore was the consuming contractor liable for paying use tax. However, the Taxpayer has failed to provide any contracts or agreements with the Vendor for the transactions at issue demonstrating this assertion.

Real Property Installation by Subcontractor

Pursuant to Title 23 VAC 10-210-410 A, with regard to real property construction, a contractor is deemed to be the user or consumer of all tangible personal property, regardless of whether such contractor is the prime contractor or a subcontractor. In real estate contracts involving a real property owner, general contractor, prime contractor and a subcontractor, the Department has generally ruled that the ultimate user and consumer of the tangible personal property would be the contractor that performed the installation or affixation work. See P.D. 99-118 (5/19/1999) and P.D. 20-92 (5/27/2020).

Further, Virginia Code § 58.1-625 A makes the sales or use tax the legal debt of the purchaser. Under Title 23 VAC 10-210-410 A, “[i]f a supplier of a contractor doing work in Virginia does not collect the Virginia tax from the contractor, the contractor will be liable for the use tax on the contractor’s purchases from the supplier.”

Accordingly, while a dealer may be obligated to collect the tax on their sales to a contractor, the Department may look to either the dealer or the consumer for any tax liability. This position has been upheld by the United States District Court for the Western District of Virginia, Roanoke Division when it opined, “[a]lthough the seller is legally obligated to collect the tax from the purchaser, the statute makes the tax the legal debt of the purchaser.” See United States v. Forst , 442 F. Supp. 920, 923 (W.D. Va. 1977), aff’d, 569 F.2d 811 (4th Cir. 1978). Under this statutory construction, the Department may seek payment of the tax from either the dealer or the consumer of tangible personal property.

In the case at hand, the documentation appears to indicate that the Vendor sold equipment to the Taxpayer and separately contracted with a third party that performed the installation. Under these circumstances, the Vendor could have been engaged as the prime contractor and the third party as the subcontractor. As indicated above, the subcontractor, as the user and consumer of the property, would generally be legally considered to be the consumer liable for the tax.

However, instead of acting as the prime contractor, the Vendor apparently considered itself to be a retailer and charged, collected, and remitted the sales and use tax on the HVAC equipment and supplies. As structured, the Taxpayer would be considered to have purchased tangible personal property and provided the same to the contractor performing the installation.

Typically, the only time that a consuming contractor would be subject to use tax when a customer purchases the materials that are used in real property contracting is when a customer is exempt from sales tax. This usually occurs when the purchasing consumer is an exempt organization. See, for example, P.D. 04-207 (11/30/2004) and P.D. 05-159 (10/7/2005). As invoiced, the equipment was purchased by the Taxpayer who paid the sales tax. Because the Taxpayer is not an organization exempt from Virginia sales and use tax liability, unless the Vendor, or a subcontractor of the Vendor, performed the installation, the Taxpayer was liable for the sales tax for the purchase of the HVAC systems.

Documentation

As indicated above, the Vendor’s invoices indicate that it considered itself to be a dealer of tangible personal property that was required to collect and remit sales and use tax. Virginia Code § 58.1-102 requires taxpayers to maintain suitable records that substantiate information required by the Department. More specifically, under Virginia Code § 58.1-633 A, dealers are required to “keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.”

The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax and that the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a dealer. See P.D. 92-36 (4/23/1992), in which the Department ruled that each purchase or sale transaction exists separately and must be analyzed individually in order to determine how the tax applies.

The information submitted with the application included copies of invoices from the Vendor. Without exception, the invoice data provided shows materials and taxes, but no details for any services. Based on the transactional evidence, the Vendor appropriately added the tax onto the sales of the HVAC equipment and supplies.

Additional post factum communications between the Taxpayer and the Vendor indicate the Vendor was responsible for installing the HVAC systems. However, no contract or agreement or other transactional documentation has been provided that evidence’s the Vendor’s responsibility for the installation of the HVAC systems.

Refund Procedure

The conflicting information and imprecise documentation confirm the rationale of Virginia’s statutes regarding sales and use tax refunds. Under Virginia Code § 58.1-625 C, any dealer that collects sales or use tax on an exempt or non-taxable transaction is required to remit the erroneously or illegally collected tax to the Department unless the tax has been refunded to the consumer or credited to their account. To assist dealers and consumers seeking refunds or credits, the Department issued retail sales and use tax refund claim procedures (the “Procedures”). In accordance with the Procedures, a dealer must refund sales or use tax erroneously collected on transactions exempt or not subject to the tax directly to the consumer when requested to do so by such customer unless one of the limited circumstances applies:

1. The dealer believes the transaction was properly subject to the tax.

2. The dealer is no longer in business.

3. Refunding the tax would cause an undue financial hardship to the dealer.

The onus of both providing and requesting a refund is placed on the dealer because it should have the most complete understanding of its business operations and practices and be in the best position to accurately document its sales transactions.

Further, Virginia Code § 58.1-603 imposes the sales tax on, among other transactions, “the gross sales price of each item or article of tangible personal property when sold at retail or distributed within this Commonwealth.” The equipment at issue was, prior to installation into realty, tangible personal property subject to sales and use tax. As such, Virginia is entitled to the tax from the sale or use of the equipment and supplies. Absent any evidence that the sales or use tax was remitted by another entity or as a result of another transaction, the sales tax remitted by the Vendor on the transactions with the Taxpayer are the only sales that satisfy the imposition of the tax under Virginia Code § 58.1-603.

DETERMINATION

The case at hand highlights the difficulty of a consumer applying directly to the Department for a sales and use tax refund. The transactional record fails to support the argument that the Vendor was operating as a contractor in its dealings with the Taxpayer and the contradictory information obtained when the refund request was filed lacks objective scrutiny. Accordingly, the Taxpayer’s request for a refund cannot be granted.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legal Affairs, Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

Kristin L. Collins

Deputy Tax Commissioner

Commonwealth of Virginia

Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Kristin Collins, Deputy Tax Commissioner, the authority to sign for me any and all rulings, appeals, offers in compromise, and penalty waivers in any instance where a conflict of interest may exist with a taxpayer. This authority shall be in effect from the date signed until revoked.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3502.B

Related Documents

90-210

92-36

99-118

04-207

05-159

12-19

17-157

20-92

23-8