My audit includes a building permit charge and two big-box retailer purchases I say were already taxed — plus a broader dispute over use tax on materials I already collected sales tax on. What can be fixed?

Plain-English summary

An energy solutions company specializing in the sale, service, and installation of fuel dispensers, monitoring systems, and related equipment was audited for December 2017 through September 2020. The auditor found the Taxpayer had been operating as a real-property contractor (not a retailer) and had improperly charged, collected, and remitted retail sales tax on its installation jobs instead of paying tax on its own material purchases. That triggered a use tax assessment on the Taxpayer's untaxed purchases. The Taxpayer's correction request raised two separate issues.

Issue 1: the erroneous-sales-tax credit. As in other recent contractor rulings, the Department confirmed the Taxpayer was properly reclassified as a contractor under Virginia Code § 58.1-610 A and 23 VAC 10-210-410 A, since its materials became real property upon installation. The Taxpayer argued that being assessed use tax on materials for which it had already collected and remitted sales tax created a double-taxation result. The Department's historical policy generally hasn't allowed such a credit (P.D. 07-135), but the new one-time credit under Virginia Code § 58.1-1812 C — effective July 1, 2024, for a contractor's first offense — may now apply. Because this correction request came in before the Department's implementing bulletin (VTB 24-3), the case is being sent back to field audit staff to determine the Taxpayer's eligibility and adjust the assessment if warranted, rather than being decided in this ruling.

Issue 2: three specific disputed transactions. The Taxpayer separately argued that three transactions shouldn't have been counted as untaxed exceptions at all: a building permit charge, and purchases from two large retailers. For the building permit, the Taxpayer provided the actual invoice, and the auditor agreed the charge should be removed. For the two retailer purchases, though, the Taxpayer could only offer circumstantial reasoning — that those retailers routinely collect sales tax and don't allow customers to use resale certificates in-store — rather than documentary proof that tax was actually paid on those specific purchases. Because Virginia law (§ 58.1-633; 23 VAC 10-210-470) requires dealers to keep three years of complete purchase records, and the Taxpayer couldn't produce them for these two transactions, the Department left those exceptions in the assessment.

What this means for you

Contractors pursuing the new erroneous-sales-tax credit

The credit review and any separate factual disputes about your audit are handled independently — winning (or losing) on the credit doesn't affect your ability to separately dispute specific line items in the audit sample, and vice versa.

Disputing specific audit exceptions

Circumstantial arguments about a vendor's "usual practice" aren't enough on their own. If you want a specific purchase removed from an assessment, you need the actual invoice, receipt, or other record showing tax was in fact charged and paid — general assertions about how a store normally operates won't substitute for documentation.

Accountants and tax professionals

When helping a contractor client challenge audit exceptions item by item, prioritize gathering the underlying purchase records before filing the correction request — as this ruling shows, a plausible-sounding argument without supporting documentation simply won't move the needle on individual line items, even while other, unrelated issues (like the new credit) get more favorable treatment.

Common questions

Q: Can I dispute individual line items in my audit assessment separately from a bigger legal argument?
A: Yes — this ruling resolved a building-permit exception and a broader use-tax-credit argument as two entirely separate questions, with different outcomes for each.

Q: Why didn't my "the store always charges tax" argument work to remove an exception?
A: Because it's circumstantial, not documentary. Virginia requires dealers to keep three years of complete purchase records, and without actual proof tax was paid on that specific transaction, the Department can't remove the exception.

Q: What documentation would have worked for the retailer purchases?
A: An invoice or receipt showing sales tax was actually charged and paid on those specific purchases — the same kind of documentation that got the building permit exception removed.

Q: Does a favorable line-item correction affect my eligibility for the new one-time credit?
A: No — they're evaluated independently; this taxpayer got both a line-item correction AND a referral for credit-eligibility review in the same ruling.

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
• 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
• Va. Code § 58.1-633; 23 VAC 10-210-470 — dealer must keep three years of complete purchase records

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-147

Original ruling text

December 18, 2024

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

Dear *:

This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the periods December 2017 through September 2020.

FACTS

The Taxpayer, an energy solutions company that specializes in the sale, service, and installation of fuel dispensers, monitoring systems, and related equipment, was audited by the Department. The auditor concluded that the Taxpayer was operating as a contractor during the audit period, but was improperly charging, collecting, and remitting the retail sales tax on its sales to customers as a retailer. The auditor included the Taxpayer’s purchases of tangible personal property used or consumed in Virginia as exceptions in the audit. As a result, the Taxpayer was assessed use tax and interest on its purchases. The Taxpayer filed and application for correction contending that the assessment of use tax and interest creates an inequitable result for Virginia, and certain purchase transactions upon which the sales tax was correctly paid to the vendor should be removed from the audit exceptions.

DETERMINATION

Contractors

Generally, real property contractors must comply with Virginia Cod e § 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 facts in this case, the Taxpayer incorrectly operated as a retailer during the audit period. The auditor properly classified the Taxpayer as a contractor because the tangible personal property purchased by the Taxpayer was used and consumed in work performed in Virginia and became real property upon installation. See Public Document (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 the relevant transactions as retail sales and charged the sales tax to its customers. Consequently, material purchases for which the Taxpayer did not pay the sales tax were properly listed as exceptions in the audit.

Credit for Improperly Charged Sales Tax

The Taxpayer argues that the Department’s assessment of use tax and interest on tangible personal property for which the Taxpayer collected and remitted sales tax leads to an improper result. Specifically, the Taxpayer contends that applying both the sales tax and use tax to tangible personal property sold to its customers leads to a result under which the Commonwealth receives more tax than permitted by the sales and use tax statutes.

Historical 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 and subsequently refunded to the customer. See Title 23 VAC 10-210-3040.

The Department’s current policy only permits 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 customer's 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.

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 the Department 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 the law change set forth in 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 to initiate the process. A contractor will need to provide matched purchase and sales records as well as sales and use tax return details 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.

Additional Transactions

The Taxpayer also asserts that three transactions were included in the audit exceptions for which sales tax was either not due or was correctly paid to the vendor. The first transaction was for a building permit. The second and third transactions were purchases from two large retailers.

With its application, the Taxpayer provided the invoice for the building permit. After reviewing the additional information provided, the auditor agreed that the disputed charge should be removed.

As for the remaining purchases, the Taxpayer argues that both of the retailers regularly collect sales tax from customers, and it is not company policy to allow individuals to use resale exemption certificates at these stores. The Taxpayer was unable to definitively show that sales tax was paid but asserts the circumstantial evidence should be sufficient to show that tax was paid at the point of sale.

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve three years of adequate and complete records necessary to determine the amount of tax liability. See Virginia Code § 58.1-633, and Title 23 VAC 10-210-470. Included in this requirement are records of a taxpayer’s purchases, such as invoices, purchase orders, or other similar records. Without records to show that tax was properly applied to a transaction, the Department cannot remove the disputed exceptions from the audit.

CONCLUSION

As determined by the auditor, the Taxpayer was a consuming contractor that erroneously charged, collected, and remitted sales tax on its transactions that included installation into real property during the audit period at issue. Under VTB 24-3, the Taxpayer would need to file Form OIC B-2 to initiate a claim for a credit against 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 it 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. A contractor and the auditor may agree to bring the entire audit forward to correspond with the extension period.

In addition, the audit will be adjusted to reflect the removal of the exception for the building permit. After the revision of the audit is complete, the Taxpayer will be issued a revised audit report and revised 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 must 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.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents and tax bulletin cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If there are any questions regarding this determination, please contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at () * or via email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Related Documents

91-141

93-23

00-158

03-87

07-68

07-135

09-177

22-56

24-3