As a contractor installing canopies in Virginia, I separately listed an 'estimated use tax' on some customer invoices at their request, but I also remitted the actual use tax I owed to the Department -- do I owe the Department both amounts, or can I get credit for what I already remitted?

Plain-English summary

Real property contractors occupy a specific spot in Virginia's sales and use tax scheme: they're treated as the end-USER of the materials they install, meaning they owe the tax themselves and generally aren't supposed to separately charge it to customers as a line-item "tax." This ruling shows what happens when a contractor does it anyway -- and how the Department untangles the resulting double payment.

The contractor, based out of state, installed commercial canopies onto Virginia real property. Virginia's use tax (Va. Code § 58.1-604) applies to tangible personal property used or consumed in Virginia, with a built-in rule against double taxation -- a transaction taxed once under sales tax or use tax can't be taxed again under the other. As a real estate contractor, the business was required by regulation (23 VAC 10-210-410 A) to remit use tax itself on the canopies and materials it purchased, and was prohibited from passing that tax on to customers as a separate charge.

The audit found that on some invoices, the contractor had separately stated an "estimated use tax" that certain customers paid -- included at those customers' own request. But the contractor argued it had ALSO remitted the actual use tax due on those same purchases directly to the Department, so it shouldn't owe the customer-charged amount on top of that.

The Department applied its trust-fund principle (23 VAC 10-210-340 C): any tax a dealer collects -- even tax collected in error on a transaction that wasn't supposed to be taxed that way -- is held in trust for the state and must be remitted, unless the dealer can show it refunded or credited the amount back to the customer. The Department pointed to a nearly identical prior case (P.D. 00-65), where a contractor installing gas station components had similarly, erroneously itemized sales tax on invoices; the Department held that itemizing a tax charge on an invoice is "calling for payment of the tax" -- i.e., collecting it -- which creates an obligation to remit it, full stop.

But P.D. 00-65 also established the flip side, applied again here: to avoid taxing the SAME transaction twice, the contractor is entitled to a credit for the use tax it separately and properly remitted on its own purchase of the materials transferred to the customer. So the contractor does owe the Department the customer-charged "estimated use tax" amount (since it collected it and must remit it), but gets a dollar-for-dollar credit against that liability for the use tax it already remitted on the same underlying purchase -- meaning it isn't actually paying twice on the same materials, just correcting which specific dollars flow through which specific line. The case was remanded to the auditor to work out that credit, with the contractor given at least 60 days to provide any additional documentation needed and the normal presumption that the assessment is otherwise correct (Va. Code § 58.1-205).

What this means for you

Real property contractors (installers, builders, and similar trades)

You're the taxable end-user of the materials you install -- you owe sales or use tax on your own purchases, and you generally should NOT separately itemize a "tax" charge to your customers on invoices. If a customer specifically asks for an estimated tax line item and you include one, you're collecting a tax you must remit to the Department, regardless of whether that itemization was proper in the first place.

Contractors who separately remitted use tax on their own purchases but ALSO charged customers something labeled as tax

You won't be taxed twice on the same materials -- you're entitled to a credit for the use tax you already properly remitted, applied against whatever you owe from the customer-charged amount. Make sure you can document both the amount charged to customers and the amount you separately remitted so the credit can actually be calculated and applied.

Any dealer who mistakenly collects tax on a transaction that wasn't actually taxable (or was taxed the wrong way)

Any amount you collect labeled as "tax" is held in trust for the state and generally must be remitted, even if collecting it was itself an error -- the only way out is showing you refunded or credited that specific amount back to the customer who paid it.

Common questions

Q: I'm a contractor and some customers asked me to separately list an "estimated use tax" on their invoices -- do I have to remit that to the Department?
A: Yes -- any amount you collect that's labeled as tax is treated as held in trust for the state and must be remitted, even if, as a contractor, you weren't technically supposed to charge tax to customers as a separate line item in the first place.

Q: If I already remitted the correct use tax on my own purchase of the materials, do I also owe the Department the "estimated use tax" I separately charged customers?
A: You owe the Department the customer-charged amount because you collected it, but you're entitled to a credit for the use tax you separately remitted on the same purchase -- so the net effect isn't paying twice for the same materials.

Q: As a real property contractor, should I be charging my customers sales or use tax as a line item at all?
A: Generally no -- you're deemed the taxable user/consumer of the materials you install and are required to remit tax yourself, not pass it along to customers as a separate tax charge. If you do it anyway (even at a customer's request), you create a collection-and-remittance obligation for whatever you collected.

Citations and references

• Va. Code § 58.1-604 (imposes use tax; a transaction taxed once under sales or use tax cannot be taxed again under the other)
• 23 VAC 10-210-410 A (real estate contractors must remit use tax themselves on purchased tangible personal property and may not pass the tax on to others as a tax charge)
• 23 VAC 10-210-340 C (tax erroneously collected on nontaxable or improperly-taxed transactions is held in trust for the state and must be remitted absent a refund/credit to the customer)
• P.D. 00-65 (4/26/2000) (a contractor who itemizes tax on invoices is "collecting" it and must remit it, but is entitled to a credit for tax separately paid on the same underlying purchase to avoid double taxation)
• Va. Code § 58.1-205 (Department assessments are prima facie correct; burden of proof is on the taxpayer)
• Va. Code § 58.1-1821 (90-day right to file another appeal after a revised assessment is issued)

Subject

Collection/Remittance of Tax : Real Property Contractor - Credit for Remitted Tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-56

Original ruling text

March 30, 2022

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

Dear * :

This will reply to your letter in which you seek correction of the sales and use tax assessment issued to * (the “Taxpayer”) as a result of an audit for the period January 2015 through December 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a * (State A) business entity, was engaged in installing commercial canopies onto real property in Virginia during the periods at issue. As result of an audit by the Department, an assessment was issued because of the Taxpayer’s failure to remit its total collected use tax. The Taxpayer appeals the assessment, asserting that previously collected and remitted use tax should reduce its assessed liability.

DETERMINATION

Virginia Code § 58.1-604 imposes the use tax on the use or consumption of tangible personal property in Virginia. In addition, subsection 3 provides that “[a] transaction taxed under [the sales tax] shall not also be taxed under this section, nor shall the same transaction be taxed more than once under either section.”

As a real estate contractor in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A, the Taxpayer was required to “remit the use tax on any tangible personal property purchased,” and is prohibited from passing the sales or use tax on to anyone else as a tax. In addition, Title 23 VAC 10-210-340 C provides:

Erroneous collection of tax on nontaxable transactions. All sales and use tax collected by a dealer is held in trust for the state. Therefore, any dealer collecting the sales or use tax on nontaxable transactions must remit to the Department of Taxation such erroneously or illegally collected tax unless he can show that the tax has been refunded to the purchaser or credited to the purchaser’s account.

In this case, the auditor found that a separately stated “estimated use tax” amount on some of its invoices was paid by certain customers. As a result, the auditor issued an assessment for the amount of use tax charged because it had not been remitted to the Department.

The Taxpayer explains that the “estimated use tax” was included at the request of some customers, but the Taxpayer remitted use tax to the Department based upon the actual amount due. The Taxpayer requests that the Department reduce its assessment to reflect those use tax remittances already provided to the Department. The auditor, however, determined that the Taxpayer was liable for the use tax it accrued and remitted in addition to the amount charged to its customers.

The Department has addressed a similar issue in Public Document (P.D.) 00-65 (4/26/2000). In that determination, a real estate contractor installed components for gas stations and erroneously charged sales tax on the transactions. The Department upheld the resulting assessment for the contractor’s failure to remit the charged and collected sales tax, finding that “by itemizing sales tax on invoices for real or tangible property installations, the taxpayer has called for payment of the tax. In other words, it is collecting tax. Anyone who collects sales tax is obligated to remit it to the Department.” However, the contractor was also given a credit for tax paid on the purchase of the property transferred to its customers to avoid double taxing those items.

The information provided shows the Taxpayer separately stated estimated sales tax on invoices paid. As a contractor, the Taxpayer is deemed to have erroneously charged its customer sales tax and was required to remit the tax collected. Accordingly, the Department correctly included the amount of use tax the Taxpayer collected from its customer in its audit computation.

As indicated in P.D. 00-65, however, the Taxpayer is entitled to a credit for the amount of use tax previously remitted for the same transactions. As such, this case will be remanded to the auditor to adjust the assessment in accordance with this determination.

If additional information is needed to determine the amount of the Taxpayer’s use tax payment that was applicable to transactions at issue, the auditor should request that information from the Taxpayer and allow at least 60 days for the Taxpayer to respond. An assessment of tax by the Department is deemed prima facie correct, meaning the burden of proof is upon the Taxpayer to show that the assessment should be adjusted. See Virginia Code § 58.1-205.

If the Taxpayer is unable or fails to provide any necessary information in the time provided, an updated bill with accrued interest to date will be issued. The Taxpayer should pay the amount due within 30 days of the date on the bill to avoid the accrual of additional interest or possible collection action. If the Taxpayer continues to disagree, it will be provided 90 days from the issuance of the update assessment to file another appeal pursuant to Virginia Code § 58.1-1821.

The Code of Virginia sections, regulations, and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions regarding this determination, please contact * in the Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1929.C

Related Documents

00-65