I fabricate and deliver septic tanks to job sites where my customers hook them up -- am I an installer who doesn't owe sales tax, or a retailer who does? And can prior phone advice from the Department protect me either way?

Plain-English summary

A septic tank fabricator was audited (its first-generation audit) for August 2017 through June 2020. The auditor found the fabricator wasn't charging sales tax on its septic tank sales made without installation, and assessed tax and interest on those untaxed sales -- instructing the fabricator to separately seek a refund of any tax it had erroneously paid on its own material purchases. The fabricator pushed back on three fronts: that its activity really was "installation" (so it shouldn't be taxed as a retail sale at all), that the vendor-refund process was unreasonably burdensome, and that it had received prior Department advice telling it not to charge sales tax. All three arguments failed.

Delivering to a hole isn't "installing." 23 VAC 10-210-410 C requires a fabricator who sells tangible personal property to customers -- including contractors -- for their own use or consumption to charge and collect sales tax on the sale. The fabricator argued its activity constituted installation instead, which would have made it a consuming contractor rather than a taxable retailer. But the Department's own definition of "install" -- "to set up or fix in position for use or service" (P.D. 98-12) -- wasn't met. The fabricator delivered septic tanks to job sites and placed them into holes dug by a separate entity; its contractor-customers then hooked up the tank to the septic system afterward. Placing a tank into a prepared hole doesn't fix it in position for actual use or service -- that final step (connecting the system) is what makes it functional, and the CONTRACTORS did that, not the fabricator. So the contractors -- not the fabricator -- were the true installers and end users, and the fabricator was correctly classified as a retailer required to collect and remit tax on its sales.

No credit for erroneously paid purchase tax, absent proof of a vendor refund attempt. Because the fabricator was really a fabricator-retailer, it could have bought its raw materials tax-exempt under a resale certificate (23 VAC 10-210-410 C) -- but it apparently paid sales tax to its vendors on those purchases anyway. Virginia's Retail Sales and Use Tax Refund Claim Procedures require a taxpayer to first request a refund directly from the vendor that made the sale (to keep local tax allocation and dealer discounts straight); only when the vendor can't or won't refund it can the taxpayer bring a claim to the Department itself. The Department has, in limited cases (P.D. 17-115, P.D. 18-10), allowed a credit in an audit instead of a separate refund claim -- but only after the taxpayer showed it actually tried to get a vendor refund and was refused or unable to obtain one. Here, the fabricator argued the vendor-refund process was impractical, but provided no evidence it had even attempted to request a refund, experienced hardship doing so, or was refused. Without that evidence, no credit was available.

Oral advice doesn't trigger the written-advice abatement rule. The fabricator said a 2017 phone call to the Department led it to believe it needn't collect sales tax. Va. Code § 58.1-1835 requires the Department to abate tax, interest, and penalty attributable to erroneous advice, but only where: (1) the advice was written, given in response to a specific written request, and reasonably relied on; (2) the error wasn't due to the taxpayer's own inaccurate or incomplete information; and (3) the facts described in the advice request match the actual facts, with no change in operations since. A phone call satisfies none of the "written" requirements. The Department also noted a deeper problem: the fabricator had apparently described itself during that call as "fabricating and installing" septic tanks -- a characterization that would reasonably lead a Department representative to give contractor-oriented guidance. The later, fuller audit review found the fabricator wasn't actually installing anything. Both the earlier oral guidance and the later audit conclusion could each have been accurate, given the different facts presented at each point.

Outcome. The assessment was upheld in full, with an updated bill (interest accrued) and 30 days to pay before further interest and collection action.

What this means for you

Fabricators who deliver finished products to a job site without fully connecting or completing the installation

Merely placing your product into position (a hole, a slot, a mounting bracket) isn't necessarily "installing" it for Virginia sales tax purposes. If a separate party (a contractor, the customer) still has to connect, hook up, or otherwise finish putting the item into actual use, YOU may be the retailer -- required to collect sales tax -- rather than a tax-exempt installing contractor.

Anyone who paid sales tax to a vendor on a purchase that should have qualified for a resale exemption

Go back to your VENDOR first and request a refund directly -- document that request. Only if the vendor can't or won't refund it should you escalate to the Department, and you'll need to show your vendor-refund attempt failed to get any credit considered in an audit.

Businesses relying on advice from a phone call with the Department

Get it in writing. Va. Code § 58.1-1835's abatement protection for erroneous Department advice only covers WRITTEN advice given in response to a specific WRITTEN request -- oral guidance, however clearly remembered, doesn't qualify, and how you described your own business during that call matters too.

Businesses whose operations have evolved since getting Department guidance

Even written advice only protects you if the facts you described match your actual, current operations. If your business practices differ from what you originally described (here, actually installing vs. merely delivering), earlier guidance may not apply to your current situation.

Common questions

Q: I fabricate and deliver a product to a job site, but someone else connects or finishes installing it -- am I an installer or a retailer for sales tax purposes?
A: Likely a retailer. "Install" means to set up or fix the item in position for actual use or service -- if a separate party does that final connecting step, you may be the seller of tangible personal property, required to collect sales tax, rather than a tax-exempt consuming contractor.

Q: I paid sales tax to my vendor on materials that should have been resale-exempt -- can I get credit for that in my audit?
A: Only if you first tried to get a refund directly from your vendor and can show the vendor couldn't or wouldn't provide it. Simply asserting the vendor-refund process is impractical, without evidence you attempted it, won't secure a credit.

Q: The Department gave me advice over the phone that turned out to be wrong -- can I get my assessment abated?
A: Not under Va. Code § 58.1-1835, which only protects reliance on WRITTEN advice given in response to a specific written request. Oral advice doesn't qualify for this abatement protection.

Citations and references

Statutes and regulations:

• 23 VAC 10-210-410 C -- a fabricator who sells tangible personal property to customers, including contractors, for their use or consumption must charge and collect sales tax; may buy raw materials tax-exempt for resale
• Va. Code § 58.1-1835 -- the Department must abate tax/interest/penalty attributable to erroneous WRITTEN advice, given in response to a specific written request, reasonably relied on, where facts and operations haven't changed

Authorities the Department relied on (described here, not linked): P.D. 98-12 (1/20/1998) ("install" means to set up or fix in position for use or service); P.D. 17-115 (6/29/2017) and P.D. 18-10 (2/2/2018) (an audit credit for erroneously paid vendor tax requires evidence the taxpayer tried and failed to get a vendor refund). Note: 23 VAC 10-210-410 C is the same fabricator-classification regulation cited in this corpus's already-enriched P.D. 24-105 and P.D. 24-111.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-107

Original ruling text

October 23, 2024

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 August 2017 through June 2020.

FACTS

The Taxpayer, a fabricator of septic tanks, was audited for the period at issue. Under a first-generation audit, the auditor found that the Taxpayer was not charging sales tax on its retail sales of septic tanks made without installation, resulting in an assessment for tax and interest due on the untaxed sales. The auditor instructed the Taxpayer to seek a refund of any taxes improperly paid on its purchases.

The Taxpayer filed an application for correction contending that it should be treated similarly to the rest of the home construction industry and consistent with the prior advice it received from the Department. The Taxpayer argues that it would be almost impossible to request refunds of the tax paid on its purchases directly from its vendors. The Taxpayer also claims that it was orally advised to pay tax on its purchases, rather than collect tax from its customers on its sales.

DETERMINATION

Fabrication

Title 23 of the Virginia Administrative Code (“VAC”) 10-210-410 C states the following regarding fabricators that fabricate and sell tangible personal property to customers:

A person who fabricates tangible personal property and sells it to customers, including contractors, for use or consumption by them, must add the sales tax to the sales price and collect it from the customer for payment to the state. Raw materials, component parts, and other tangible personal property to be fabricated for sale may be purchased under a resale certificate of exemption.

During the audit, the auditor concluded that the Taxpayer did not install the septic tanks into real property. Rather, it delivered the septic tanks to job sites and placed the tank in a hole, which was dug by a separate entity. The Taxpayer’s customers (i.e., contractors) installed the septic tanks after the property was delivered.

The Taxpayer believes its activity constituted installation. However, the Department has held that the term “install” means “[t]o set up or fix in position for use or service.” See Public Document (P.D.) 98-12 (1/20/1998). The Taxpayer’s activity of placing a tank into a prepared hole fails to satisfy the requirements of affixing such tank for use or service as a septic system. Instead, the purchasers that hooked the tank to the system were the installers. Thus, contractors, not the Taxpayer, were the end users or consumers of the septic tanks. Because the Taxpayer sold septic tanks without installation, it is considered to be a retailer required to collect and remit tax on its retail sales.

Refund or Credit of Tax Paid

Pursuant to Title 23 VAC 10-210-410 C, the Taxpayer was entitled to use a resale exemption certificate to make tax-free purchases of property that would be fabricated and resold. The Department’s policy with respect to refunds of sales taxes erroneously paid to vendors is addressed in the Retail Sales and Use Tax Refund Claim Procedures (the “Procedures”), which are available on the Department’s website. Taxpayers are required to request a refund from the dealer that made the sale to prevent misallocations of the local sales tax and to take into account any dealer’s discount that may have been taken on the return filed by the dealer. Dealers are required to refund sales tax erroneously collected on transactions exempt or not subject to the tax directly to the customer when requested to do so by the customer, except in certain very limited situations. Only when a dealer is unable to provide a refund or credit of the tax can a taxpayer submit a refund claim with the Department. Any refund issued by the Department is generally reduced by the dealer’s discount.

Because the Taxpayer improperly paid the retail sales and use tax when it purchased materials and supplies needed for its fabrication process, the auditor provided information regarding requests for a refund of the taxes from vendors pursuant to the Procedures. The Taxpayer argues that the refund procedure is unreasonably burdensome because obtaining refunds directly from its vendors is almost impossible. As indicated above, however, these requirements are necessary to maintain the integrity of the distribution of the local portion of the tax and account for any discount claimed by a dealer.

In limited circumstances, the Department has agreed to grant a credit against an audit assessment rather than having a taxpayer separately request a refund of the erroneously paid tax. In Public Document (P.D.) 17-115 (6/29/2017) and P.D. 18-10 (2/2/2018), the Department permitted a credit in an audit for sales taxes paid to vendors on tangible personal property purchased for resale only after providing evidence that tax was paid to the vendors on purchases that otherwise would have qualified for the resale exemption and that the vendors could not or would not issue a refund directly. The Taxpayer has not provided any evidence to show that it attempted to request a refund directly from its vendors, experienced undue hardship while attempting to request a refund from its vendors or was refused a timely requested refund by its vendors.

Previous Advice

The Taxpayer states that it called the Department in 2017 to inquire about its responsibility to collect sales tax. Based on this conversation, the Taxpayer claims that it was advised not to charge sales tax on its sales in accordance with Title 23 VAC 10-210-410, which provides guidance regarding the sales and use tax application to transactions involving contractors.

Virginia Code § 58.1-1835 provides that the Department must abate any portion of tax, interest, and penalty attributable to erroneous written advice by the Department under the following conditions:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

3. The facts of the case described in the written advice and the request therefor are the same, and the taxpayer’s business or personal operations have not changed since the advice was rendered.

Without full knowledge of the facts presented by a taxpayer and the specific advice provided orally by a representative, the Department is unable to determine whether such taxpayer could have reasonably relied on the advice that resulted in the assessment. In considering any verbal advice given, there is always a chance that the facts provided are insufficient, imprecise, or misunderstood resulting in an inaccurate response.

In its application for correction, the Taxpayer indicated that it was fabricating and installing septic tanks. If this was how it was characterized during a phone conversation, the Department’s representative may have logically assumed the Taxpayer was a contractor and provided the advice indicated. Under audit, however, after a complete review of the nature of the business operations, the Department found that the Taxpayer was not installing the systems and correctly treated its activities as a fabricator making retail sales. Both the auditor and the representative may have provided accurate advice based on the information available to them.

CONCLUSION

Based on the facts in this case, the Taxpayer made retail sales of fabricated tangible personal property without charging, collecting, or remitting the required sales tax. Further, the Taxpayer is not entitled to a refund or credit for taxes paid on its purchases and is not entitled to accommodation based on any advice it previously received from the Department. Accordingly, the auditor was correct to include the Taxpayer’s untaxed sales as exceptions in the audit, and the audit assessment is upheld.

The Taxpayer will receive an updated bill with accrued interest to date. The Taxpayer should remit the amount due within 30 days of the date on the updated bill to avoid the accrual of additional interest and possible collection action.

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 Department’s Office of Tax Policy, Appeals and Rulings, at (804) or via email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3766.C

Related Documents

98-12

07-161

11-69

17-115

18-10

20-174