If I collect sales tax from a customer by mistake, can I keep it instead of remitting it to Virginia, since I'm a contractor who normally shouldn't charge tax?

Plain-English summary

A contractor that sells and installs HVAC units and fireplaces -- and also makes some straight retail sales of tangible personal property -- was audited and assessed for three things: untaxed retail sales, untaxed purchases used in installation jobs, and sales tax the contractor had actually collected from customers but never remitted to the Department. On appeal, the contractor argued the unremitted-tax finding was a clerical error, claimed it had already paid tax on the disputed purchases, and pointed out that as a contractor it generally shouldn't be charging its customers sales tax at all. It also said more documentation was coming, but none ever arrived.

The Department rejected all three arguments. On the collected-but-unremitted tax, Virginia law is direct: any dealer who collects sales tax on a transaction -- even a transaction that turns out to be exempt or otherwise not taxable -- must turn that tax over to the Department unless it can show the money was refunded or credited back to the customer. The audit documentation showed tax had actually been collected from customers, so the "clerical error" explanation didn't hold up; the money had to be remitted regardless of whether it should have been charged in the first place. On the retail sales, the Department noted that a "dealer" under Virginia law includes anyone who sells tangible personal property at retail -- and here, in addition to its role as a contractor incorporating materials into real property (where it's a "consuming contractor" that pays tax on its own purchases rather than charging customers), the business also made straight retail sales of goods without installation, which it should have charged sales tax on. On the untaxed purchases, the contractor acknowledged it owed use tax as a consuming contractor on materials it later installed, but never produced the invoices or purchase orders needed to show it had actually paid that tax.

Because a Virginia tax assessment is presumed correct and the taxpayer carries the burden of proving otherwise, and because the contractor never supplied the promised documentation, the Department upheld the assessment in full.

What this means for you

Contractors who also make retail sales of goods

Your tax obligations split depending on the transaction: as a "consuming contractor," you generally pay use tax yourself on materials you buy and install into real property, and don't charge your customer sales tax on those. But if you also sell tangible personal property at retail without installing it, you're acting as a dealer on those sales and must collect and remit sales tax on them just like any other retailer.

Any business that collects sales tax from a customer by mistake

You still have to remit it to the Department. Virginia law doesn't let you keep tax you collected in error -- your only options are to remit it, or affirmatively show you've already refunded or credited it back to the customer.

Anyone appealing a Virginia tax assessment

Promising to send documentation later isn't enough -- if it never arrives, the assessment will be treated as correct because the burden of proof is on you.

Common questions

Q: If I mistakenly charge a customer sales tax on an exempt sale, can I just keep the money instead of sending it to Virginia?
A: No -- under Va. Code § 58.1-625, you must remit any sales tax you collect, even if it was erroneously or illegally collected, unless you can show it was refunded or credited back to the customer.

Q: As a contractor, do I ever need to collect sales tax from my customers?
A: If you're purely installing materials into real property as a consuming contractor, generally no -- you pay use tax on your own purchases instead. But if you also make retail sales of tangible personal property without installation, you must collect and remit sales tax on those sales as a dealer.

Q: What happens if I tell the Department more documentation is coming but never send it?
A: The assessment stands. Since a Virginia assessment is presumed correct, the burden is on you to prove it wrong with actual documentation -- an unfulfilled promise to provide records later doesn't meet that burden.

Citations and references

• Va. Code § 58.1-625 (dealer must remit sales tax collected, even if erroneously or illegally collected)
• Va. Code § 58.1-603 (imposition of retail sales and use tax)
• Va. Code § 58.1-612(B)(3) (definition of dealer)
• Va. Code § 58.1-610(A) (consuming contractor's use tax obligation on property incorporated into real estate)
• Va. Code § 58.1-205 (assessment presumed correct; burden of proof on taxpayer)

Subject

Administration: Audit - Failure to Provide Documentation Sales: Retail - Dual Operator, Tax Collected Not Remitted - Requirement

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-18

Original ruling text

February 21, 2023

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 May 2016 through April 2022.

FACTS

The Taxpayer sells and installs HVAC units and fireplaces to customers in Virginia. The Taxpayer also makes some retail sales of tangible personal property to its customers. An audit by the Department for the audit period at issue resulted in an assessment of tax, penalty, and interest for untaxed sales and untaxed purchases. The assessment also included tax and penalty due for sales tax that was collected and not remitted to the Department. The Taxpayer contests the assessment, alleging that the tax assessed as collected unremitted was a clerical error and asserting that tax was already paid on the untaxed purchase exceptions included in the audit. The Taxpayer notes that it is a contractor and should not charge tax to its customers. In its appeal, the Taxpayer states that additional information and documentation is forthcoming, but no documentation has been received as of the date of this letter.

DETERMINATION

Tax Collected Unremitted

Virginia Code § 58.1-625 provides, in part, that “[a]ny dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until it can affirmatively show that the tax has since been refunded to the purchaser or credited to its account.”

During the audit, the auditor reviewed invoices and other documentation provided by the Taxpayer. The auditor determined that the Taxpayer collected sales tax from its customers on certain sales made during the audit period, but failed to file sales tax returns with the Department. The Taxpayer’s claim that this was a clerical error is without merit. The documentation reviewed during the audit shows that tax was collected from the Taxpayer’s customer. According to the aforementioned authorities, the Taxpayer was required to remit all taxes it collected from its customers to the Department, even if such tax was erroneously collected.

Retail Sales

Virginia Code § 58.1-603 imposes the retail sales and use tax on every person “who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth.” The tax is collected by all persons who are “dealers” as defined in Va. Code § 58.1-612. Pursuant to subsection B 3 of this statute, the term “dealer” includes any person that:

Sells at retail, or that offers for sale at retail, or that has in its possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.

In addition to its classification as a consuming contractor, the auditor determined that the Taxpayer also makes some retail sales of tangible personal property to customers without installation and should have collected tax on these sales. Based on the authorities provided above, the untaxed sales will remain in the audit.

Untaxed Purchases

Virginia Code § 58.1-610 A provides, in part, that:

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.

The Taxpayer acknowledges its responsibility as a consuming contractor to pay the tax on its purchase of tangible personal property that it later incorporates into real property. While the Taxpayer claims that it has paid tax on its purchases of tangible personal property used in installation jobs, the Taxpayer has not provided documentation, such as invoices and purchase orders, to show that it paid the proper tax.

CONCLUSION

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct and that the burden is on the taxpayer to prove the assessment is erroneous. In this instance, the Taxpayer has not provided documentation to support its contention that the assessment of tax is incorrect. Therefore, the Taxpayer has not met the burden of proof requirement.

The assessment is correct as issued. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.

The Code of Virginia sections cited, along with other reference documents, 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 about the review of documentation, please contact the auditor. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4287.G