Could a using and consuming contractor offset its own use tax with sales tax it wrongly collected from customers and remitted to Virginia?

Subject

Taxpayer obtaining a credit for amounts improperly collected from their customers

Plain-English summary

Virginia clarified that a using and consuming contractor cannot credit sales tax wrongly collected from customers against the contractor's own use tax liability. The letter expressly overturned the contrary credit allowed in part of P.D. 03-87.

A contractor installing property into real estate owed tax on the cost of its materials. If it instead bought materials exempt for resale and charged customers sales tax on the installed work, the customer-paid money did not become the contractor's payment of its own liability.

Virginia's stated refund policy required the dealer to show either that it bore the erroneously paid tax itself or that tax collected from customers was later refunded to them. Allowing the offset without that showing would let contractors use customer funds to satisfy their own tax obligation.

What this means for you

• Classify installed real-property materials correctly before buying them tax-free.
• Do not assume remitting an improperly collected customer tax cures the contractor's separate use tax.
• Refund customers before seeking relief when the customer bore the erroneous tax.
• P.D. 03-87 cannot be cited for the overruled credit described here.

Common questions

Did remitting the collected sales tax to Virginia create a credit? No. The funds were paid by customers, not the contractor.

Could the contractor ever receive a refund? The ruling describes relief when the contractor bore the tax or refunded customer-collected tax.

What prior guidance changed? The portion of P.D. 03-87 that granted the offset was overturned.

Citations and references

• 23 VAC 10-210-410.
• P.D. 03-87 (November 12, 2003), as partially overturned.
• P.D. 95-88 (April 28, 1995) and P.D. 05-62 (April 18, 2005).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-135

Original ruling text

September 4, 2007

Re: Va. Code § 58.1-1821 Appeal

Clarification

Dear *:

This letter clarifies the Department of Taxation's ("TAX") policy concerning the allowance of a credit against a using and consuming contractor's use tax liability for sales taxes collected by the taxpayer in error from its customers and remitted to TAX. This letter overturns Public Document ("PD") 03-87 (November 12, 2003) to the extent that it authorized such a credit.

FACTS

On November 12, 2003, TAX issued PD 03-87 concerning a taxpayer who installed cable and complete telecommunications and computer systems. The taxpayer erroneously purchased all cable exempt of the tax for resale and charged sales tax to its customers at the time of installation. The taxpayer requested that TAX reverse its policy and treat cabling installed in walls, floors, and ceilings as a retail sale. The Tax Commissioner declined to reverse TAX's longstanding policy of treating cabling installed in walls, floors, and ceilings as a part of real property, the purchase of which is taxable to the contractor who performs the installation. Although the Tax Commissioner declined to reverse TAX's policy with respect to cabling wires, he granted the taxpayer a credit against the use taxes assessed on the cabling in the audit, using the following language:

In the event the Taxpayer has not refunded Virginia sales and use tax incorrectly collected on cabling to Virginia customers, I will allow a credit of taxes collected and remitted against taxes assessed on cabling in the audit.

DETERMINATION

TAX has issued several rulings addressing its authority to allow a credit against a taxpayer's use tax liability for sales taxes paid in error by its customers. In Public Document 95-88 (April 28, 1995), the taxpayer erroneously collected sales tax from its customers on the sale of printing and other advertising services, instead of properly remitting tax for its use. The taxpayer argued that TAX received more revenue through the erroneous collection of tax on sales than it would have received if the taxpayer had properly paid tax on its purchases, and thus, the taxpayer should be entitled to a credit against the use tax assessment for the amount of sales tax collected. The Commissioner declined to extend such a credit to the taxpayer, based on the rationale that when a taxpayer erroneously charges tax on its sales to customers, it represents itself as a dealer, and as such, is entitled to a refund 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. As the taxpayer did not meet either requirement, he was not entitled to refund, and as such, was also ineligible for a credit.

Subsequent to the issuance of PD 03-87, the Tax Commissioner reiterated this longstanding policy in Public Document 05-62 (April 18, 2005). In that ruling, the taxpayer, an installer of fabricated materials in Virginia real estate construction projects, erroneously collected sales tax from customers on materials erected and installed, rather than properly remitting use tax on his purchases. The Tax Commissioner refused to allow a credit against the taxpayer's use tax liability for sales taxes paid in error by its customers. This determination was based upon 23 VAC 10-210-410, which classifies a fabricator who contracts to perform services with respect to real estate construction as a using or consuming contractor, who must therefore pay the tax on the cost price of the raw materials which make up such fabricated property. The Commissioner reasoned that in permitting a credit in this case, he would be ignoring well-established law and regulations that have been consistently applied.

These rulings clearly establish TAX's longstanding policy of prohibiting a credit against a taxpayer's use tax liability for sales taxes paid in error by its customers where the taxpayer is classified as a using or consuming contractor and fails to pay sales tax on the cost price of the products. To allow such a credit would authorize using and consuming contractors to use monies improperly collected from their customers to pay their own tax liability. Additionally, it would undermine TAX's longstanding policies regarding using and consuming contractors by enabling such contractors to avoid financial responsibility for violating TAX's policy by obtaining a credit for amounts improperly collected from their customers.

This letter overturns that portion of Public Document 03-87 that granted the taxpayer a credit against the use tax assessment for the amount of sales tax erroneously collected. As discussed in the ruling letters above, TAX will not allow a credit against a taxpayer's liability for taxes paid in error by its customers where the taxpayer is classified as a using or consuming contractor and fails to pay sales tax on the cost price of these products or remit use tax for the use of these products.

I hope this resolves any issues with respect to PD 03-87. If you have any questions, please contact *, Director of Policy Development at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

This letter overturns that portion of Public Document 03-87 that granted the taxpayer a credit against the use tax assessment for the amount of sales tax erroneously collected

Related Documents

03-87

05-62