I run a flooring company that sells and installs floor coverings, and treated every sale as a taxable retail sale -- now I owe use tax too. If I later resell inventory I already paid tax on, how do I avoid paying tax on it twice?

Plain-English summary

A retail flooring company sold floor coverings and installation services to commercial and residential customers throughout Virginia and, for sales and use tax purposes, consistently treated every transaction as a taxable retail sale. Audited for August 2018 through July 2021, the auditor found the business was actually operating as a "dual operator" — part retailer, part consuming contractor — and assessed use tax on materials the business had installed into real property without ever paying tax on them at purchase.

Same dual-operator hook as companion rulings. As in the closely related P.D. 24-144, this business is analyzed under 23 VAC 10-210-410 B, which covers contractors who both install tangible personal property into realty and sell such property to customers for their own use. Under that rule, a dual operator is a dealer that may buy materials tax-exempt with a resale certificate UNLESS it knows, at the time of purchase, that the specific item will go into a particular installation job — and must pay tax when it later withdraws inventory from stock for its own installation work. The auditor properly classified the flooring company as a contractor for its installed jobs (citing the same string of prior rulings, P.D. 91-141, 93-23, 95-88, and 00-158), so the untaxed materials used in installations were correctly listed as audit exceptions.

The same brand-new relief, sent back for eligibility review. The company argued the result amounted to double taxation, since it had already collected and remitted sales tax on the very same property now assessed use tax. The Department's historical policy generally refused this kind of credit (P.D. 07-135), with only narrow exceptions (P.D. 07-68, P.D. 09-177). But Virginia's new one-time credit under § 58.1-1812 C (effective July 1, 2024) now allows exactly this offset for a contractor's first offense. Because the correction request predated the Department's implementing bulletin (VTB 24-3), the case was returned to field audit staff to determine eligibility and adjust the assessment.

A distinct, practical addition: reselling already-taxed inventory without installation. This ruling spells out a mechanic not detailed in the corpus's other one-time-credit companions. Going forward, the company must pay sales tax to its vendors on all materials it buys (since it both installs and resells, and generally can't tell in advance which a given item will become). But if it later sells a SPECIFIC item at retail WITHOUT installing it, it doesn't end up paying tax twice: it collects sales tax from that retail customer as usual, then deducts the item's original purchase price on Line 3 of its monthly Retail Sales and Use Tax Return and worksheet, remitting only the difference between the sales tax it collected from the customer and the sales tax it already paid its vendor — provided it keeps documentation of the transaction with its return worksheet.

What this means for you

Dual-operator contractors (sell-and-install businesses) with a similar erroneous sales-tax-only history

Check whether Virginia's new one-time credit (§ 58.1-1812 C) applies to your situation, particularly if you can show the same specific property was both taxed at sale and separately assessed use tax — but understand it's available only for a first offense and won't apply again in future audits.

Contractors who pay sales tax on inventory, then resell some of it without installation

You're not stuck double-paying tax. If you already paid sales tax to your vendor on an item and then sell that specific item at retail with no installation, collect sales tax from your customer as normal, then use the Line 3 deduction on your monthly return to net out the tax you already paid — keeping documentation on file to support it.

Accountants and tax professionals

This Line 3 deduction mechanic is a useful, concrete tool for dual-operator clients managing mixed inventory (some items installed, some resold outright) — build it into your client's monthly sales and use tax return process rather than treating every purchase as a permanent tax cost.

Common questions

Q: I'm a dual-operator contractor and already paid sales tax on an item I bought — now I want to resell it at retail instead of installing it. Do I pay tax twice?
A: No. Collect sales tax from your retail customer as usual, then deduct the item's original purchase price on Line 3 of your monthly sales and use tax return, remitting only the difference between what you collected and what you already paid your vendor.

Q: Is this the same "one-time credit" doctrine as other Virginia contractor rulings in this corpus?
A: Yes — same statute (§ 58.1-1812 C), same dual-operator regulatory hook (23 VAC 10-210-410 B) as P.D. 24-144, and the same field-audit-eligibility-review process as P.D. 25-8 and its companions.

Q: Can I use both the one-time credit AND get a sales tax refund for the same erroneously collected transaction?
A: No — a contractor isn't eligible for both the § 58.1-1812 C credit and a separate sales tax refund on the same transaction.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-610 A — contractor deemed to purchase tangible personal property for its own use in real property contracts
• 23 VAC 10-210-410 A — tangible personal property incorporated into real property is used/consumed by the contractor
• 23 VAC 10-210-410 B — a dual-operator contractor may buy exempt for resale only if it knows at purchase time the property will be used in a specific contract
• Va. Code § 58.1-1812 C — one-time credit for erroneously collected/remitted sales tax against a related use tax assessment, effective July 1, 2024

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-123

Original ruling text

November 18, 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 2018 through July 2021.

FACTS

The Taxpayer, a retail flooring company, sold floor coverings and installation services to commercial and residential customers. For sales and use tax purposes, the Taxpayer consistently treated itself as a retailer. The Taxpayer was audited for the period at issue. Based on the Taxpayer’s operations, the auditor found that the business was operating in a dual capacity of both consuming contractor and a retailer. As a result of the audit, the Taxpayer was charged use tax on untaxed purchases of tangible personal property used in the performance of its contracting business. The Taxpayer filed an application for correction, contending that it properly classified itself as a retailer, that the Taxpayer claims it was not aware of the law change, and that sales and use taxes were paid for which a credit should be granted.

DETERMINATION

Contractors

Generally, real property contractors must comply with Virginia Code § 58.1-610 A, which provides:

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. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.

The regulation that interprets this provision, Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A states:

Tangible personal property incorporated in real property construction that loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor.

Based on the audit findings, the Taxpayer was both a retailer of floor covering materials and supplies and a using and consuming contractor with regard to installing floor coverings during the audit period. Under these operating conditions, the Taxpayer would be considered to be a dual operator.

Dual Operator

Title 23 VAC 10-210-410 B addresses contractors who operate in a dual capacity of installing tangible personal property into realty and selling tangible personal property to customers for their own use or consumption. This regulation provides that applicable contractors are considered dealers and must obtain a Certificate of Registration. As a dealer, the contractor may purchase tangible personal property under a resale exemption certificate, unless it knows at the time of purchase that the property will be used or consumed in connection with a specific contract. Similarly, if the contractor removes tangible personal property from its sales inventory for use in the performance of any contract, it must include the cost of the tangible personal property on its sales and use tax return and pay the tax.

The Taxpayer incorrectly operated as a retailer rather than a dual role contractor during the audit period. The auditor properly classified the Taxpayer as a contractor when the tangible personal property purchased was used and consumed in Virginia jobs and became real property upon installation. See Public Documents (P.D.) 91-141 (7/31/1991), P.D. 93-23 (2/9/1993), and P.D. 00-158 (8/25/2000). As a contractor, the Taxpayer was required to pay the sales tax to its vendors or accrue and remit the use tax directly on its purchases of tangible personal property consumed in its real property contracts. Instead, the Taxpayer erroneously treated its transactions as retail sales and charged the sales tax to its customers. Consequently, material purchases for which the Taxpayer did not pay the tax were properly listed as exceptions in the audit.

Credit for Improperly Charged Sales Tax

The Taxpayer contends that remitting the tax as assessed to the Department would be double taxation since it paid sales and use tax throughout the audit period and did not receive full credit for the taxes paid.

Existing Policy

When any contractor erroneously collects sales tax from its customers, it does not eliminate the contractor’s responsibility to remit use tax on the property being installed. See Title 23 VAC 10-210-410. Under audit, if it was determined that use tax should have been paid rather than the erroneously remitted sales tax, the contractor would receive an assessment for the unpaid use tax. Because the transaction on which the sales tax was collected is a separate transaction, credit has not generally been granted against the use tax assessment. The contractor is entitled to a refund of the sales tax 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. See Title 23 VAC 10-210-3040.

The existing policy only permitted a credit in limited circumstances. The Department has allowed credit in a case involving a dealer that incorrectly failed to charge sales tax, but the customer remitted use tax for the transaction. See P.D. 07-68 (5/10/2007). Similarly, in P.D. 22-56 (3/30/2022), the Department allowed credit where the contractor included “estimated use tax” on its invoice, essentially charging sales tax under the wrong name, but remitted the use tax for the property consumed in the transactions on its returns.

In P.D. 07-135 (9/4/2007), the Department reasoned that allowing a credit for erroneously collected sales tax would (1) authorize contractors to pay their use tax liability with their customers’ sales tax payments, and (2) allow contractors to avoid financial responsibility for violating the requirements of Virginia Code § 58.1-610. In other words, the Department does not allow a credit based merely on the fact that the tax has been paid. Further, P.D. 07-135 overruled earlier cases, including P.D. 03-87 (11/12/2003), in which a contractor that incorrectly collected retail sales and use tax from Virginia customers and had not issued refunds to such customers was permitted a credit of taxes collected and remitted against use taxes assessed in the audit. In P.D. 09-177 (11/19/2009), the Department upheld the policy established in P.D. 07-135, but permitted a credit for tangible personal property included in transactions for which the customers had assigned the rights to refunds of erroneously paid sales tax to the consuming contractor.

Since the issuance of these determinations, legislation has impacted the contractor industry in Virginia. Prior to July 1, 2017, contractors selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units, or other like or comparable items were required to purchase such items for resale tax exempt and collect sales tax from their customers. In 2017, the provision of Virginia Code § 58.1-610 that imposed this requirement was repealed. The Taxpayer in this case was directly impacted by this legislative change.

Law Change

Effective July 1, 2024, Virginia Code § 58.1-1812 C, as enacted by the General Assembly (2024 Acts of Assembly , Chapters 113 and 128), permits the Department to allow erroneously collected retail sales tax collected by a contractor from its customer and remitted to be credited against a use tax assessment made against such contractor regarding the transaction. Virginia Tax Bulletin (VTB) 24-3, issued as P.D. 24-64 (7/1/2024), provides important information concerning the new law.

Under Virginia Code § 58.1-1812 C, when a contractor has erroneously charged, collected, and remitted sales tax on transactions in which tangible personal property was installed and annexed into real property and the same tangible personal property is rightfully subject to a use tax assessment, a one-time credit for the erroneously remitted sales tax will be permitted against the use tax assessment. The credit will be limited to the use tax assessed on the contractor’s purchase transaction of tangible personal property and will be allowed for the first offense only. In practical terms, the first offense would be the first time the issue is identified on audit.

In order for a credit to be granted, a contractor must clearly show that the property included in transactions for which sales tax was erroneously collected and remitted was the same specific property that was incorporated into realty and subject to the use tax. However, credit will not be given in any case where the contractor has previously applied for and received such a credit, or in the case of a false or fraudulent action by the contractor with the intent to evade the proper tax.

For audits completed on or after July 1, 2024, audit staff will be required to determine the amount of the credit, if any. Auditors will need to have access to a contractor’s complete purchase and sales records in order to verify credit for tangible personal property for which use tax should have been accrued. If complete records are not available, auditors will work with contractors to find alternative means to verify a credit. In addition, auditors will extend the application of the credit forward in order to cover all periods in which the contractor erroneously collected sales tax. The credit is limited to the applicable use tax liability for the first offense.

For assessments made before July 1, 2024, a contractor will be required to complete and submit an offer in compromise request on Form OIC B-2 (Business Offer In Compromise: Penalty Waiver/Doubtful Liability Form) to initiate the process. A contractor will need to provide matched purchase and sales records, as well as, sales and use tax return detail to document its eligibility. A review of the offer in compromise may be conducted by office staff or referred to field audit staff depending on the nature and volume of the information provided.

In the alternative, contractors can receive a refund of any erroneous retail sales tax payments remitted if they can affirmatively show that the tax has been refunded to the Virginia customer or credited to their account. The contractor will need to follow the Retail Sales and Use Tax Refund Claim Procedures available on the Department’s website. A contractor will not be eligible for both the credit under Virginia Code § 58.1-1812 C and a sales tax refund on the same transaction.

CONCLUSION

As determined by the auditor, the Taxpayer was a dual operating retailer and contractor that erroneously charged, collected, and remitted sales tax on its transactions that included installation into real property. Under VTB 24-3, the Taxpayer would need to file Form OIC B-2 to initiate a claim for a credit toward its audit assessment or follow the procedures for claiming a refund for taxes erroneously collected from its customers. Because this application for correction was filed before the issuance of VTB 24-3 and requests a credit in the manner permitted under Virginia Code § 58.1-1812 C, the audit will be returned to the appropriate field audit staff to review the Taxpayer’s eligibility for the one-time credit and adjust the assessment accordingly.

The credit will be extended to periods subsequent to the audit until the date at which the Taxpayer changed its accounting system to comply with Virginia retail sales and use tax requirements or the last day of the month following the month in which the revised audit is completed, whichever is earlier. The extension does not constitute an expansion of the audit period and is limited to the credit for erroneous collection of tax. However, a contractor and the auditor may agree to bring the entire audit forward to correspond with the extension period.

After the revision of the audit is complete, the Taxpayer will be issued an updated audit report and an adjusted bill, if applicable, with interest accrued to date. No further interest will accrue provided the outstanding liability is paid within 30 days of the date of the updated bill.

Going forward, the Taxpayer is hereby instructed to pay sales tax to its vendors or accrue and remit the use tax directly to the Department on its purchases of tangible personal property consumed in its real property contracts. A credit for erroneously collected and remitted retail sales tax will not be available in future audits.

Further, because it purchases products both for retail sales and its own use and consumption, the Taxpayer is instructed to pay sales tax to its vendors on all purchases of items it will install or will use to perform installations. In such cases, the Taxpayer should not collect sales tax from its customers on installation sales.

If the Taxpayer pays sales tax to its vendor on a purchase and subsequently sells the item at retail without installation, it must collect sales tax from its customer. On its Retail Sales and Use Tax Return for the month of the sale, the Taxpayer would report the retail sale and record the item’s purchase price as a deduction on Line 3 of its monthly return and worksheet. As a result, the Taxpayer would only remit the difference between the amount of sales tax it collected from its customer and the amount of sales tax previously paid to a vendor. The Taxpayer should maintain supporting documentation regarding the transaction along with the return worksheet in its records. See VTB 17-8, published as P.D. 17-139 (6/29/2017). A credit for erroneously collected and remitted retail sales tax will not be available in future audits.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents and tax bulletins 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, Appeals and Rulings, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR\4612.F

Related Documents

91-141

93-23

95-88

00-158

03-87

07-68

07-135

09-177

17-8

22-56

24-3