I fabricate metal gates, fencing, and railings and then install them myself — am I a taxable retailer or a tax-exempt real-property contractor in Virginia?

Plain-English summary

A metal fabricator — sheet metal construction, blacksmithing, metal roofing, plus custom gates, fencing, railings, artwork, and historic restorations/reproductions — was audited for February 2013 through June 2019. It had never filed sales tax returns, and its records were incomplete. Because the best records available covered only two months, the auditor sampled those two months to estimate taxable purchases and sales for the whole period and issued an assessment for untaxed sales. The taxpayer argued it was really a real-property repair service — installing its own fabricated work into buildings — and therefore not liable for collecting sales tax at all.

Contractors vs. retailers. Virginia Code § 58.1-610 treats a business that contracts to construct, repair, or install fixtures on real estate as having purchased ALL its materials for its own use and consumption — it pays tax on the materials, and does not separately collect tax from the customer on the finished installation. But this taxpayer didn't just install its own work: it also sold fabricated items (gates, fencing, railings, artwork) at retail. Under 23 VAC 10-210-410 E, a fabricator that does both is a "dual operator," governed by a primary purpose rule based on which activity produces the MAJORITY of gross receipts:

• Mostly retail sales → buy materials tax-exempt with a resale certificate, and collect/remit tax on the full retail selling price; when inventory is later pulled for the fabricator's own installation jobs, accrue use tax on the fabricated cost of what's withdrawn.
• Mostly installation for its own real-property contracts → pay sales tax upfront on all materials to suppliers, and ALSO register, collect, and remit tax on the retail price of anything sold at retail (even though tax was already paid on the materials) — buying tax-exempt only those materials identifiable AT THE TIME OF PURCHASE as being for resale.
• Can't tell which predominates → may apply to the Department for a direct payment permit under § 58.1-624 and pay tax directly to the Commonwealth.

Why the incomplete records mattered. Because the taxpayer's books didn't show which activity — retail sale or real-property installation — made up most of its business, neither the Department nor the taxpayer could apply the primary purpose rule with confidence. Virginia dealer recordkeeping rules (§ 58.1-633 A and 23 VAC 10-210-470) require three years of daily sales records, purchase invoices, exemption/resale certificates, records of property used in the business, and an annual inventory. This taxpayer instead relied partly on paper invoices and partly on "word of mouth," so the auditor picked the two months (March 2013 and March 2016) with the most complete documentation, adjusting one month's sales upward to match financial statements and making no correction to the other despite invoices exceeding recorded sales. No customer exemption certificates were provided, and available purchase invoices didn't show sales tax collected. From those two months, taxable sales and purchases were extrapolated across the full audit period, split evenly between taxable and nontaxable proceeds.

Result: assessment upheld. Under Va. Code § 58.1-205, an assessment is presumed correct, and the taxpayer bears the burden of proving otherwise. Because the taxpayer never showed its business was limited to real-property repair, and its own recordkeeping failures forced the sampling approach, the Department found the auditor's method — authorized by § 58.1-618's best-information-available standard — reasonable, and upheld the assessment in full.

What this means for you

Fabricators and contractors who both sell and install

If you fabricate items and sometimes sell them retail but other times install them yourself into real estate, you're a "dual operator" under Virginia law, and your tax treatment turns on which activity is the MAJORITY of your gross receipts — not on how you describe your business. Track that split deliberately; don't assume "we mostly do repair work" will hold up without records to back it.

Keeping records that actually protect you

Complete records — invoices for every sale and purchase, resale/exemption certificates on file, and an annual inventory — are what let you claim the tax treatment that favors you (whichever side of the primary-purpose line you're on). Without them, the Department is entitled to use the best information available, including sampling a handful of months and extrapolating, and the taxpayer bears the burden of showing that's wrong.

Accountants and tax professionals advising fabrication businesses

If a client's primary purpose genuinely can't be pinned down from the records, or purchases are made without knowing at the time how the materials will end up being used, a direct payment permit under § 58.1-624 is the statutory escape valve — it lets the client pay tax directly rather than guessing wrong on every purchase.

Common questions

Q: I install my own fabricated work into buildings — do I ever owe sales tax on what I sell?
A: If you ALSO sell fabricated items at retail (not just install your own work), you're a dual operator, and the majority of your gross receipts determines whether you collect tax on retail sales, pay it upfront on materials, or both.

Q: What if I genuinely can't tell which activity is bigger?
A: Virginia Code § 58.1-624 lets a fabricator apply for a direct payment permit and pay tax directly to the Commonwealth rather than trying to sort it out purchase by purchase.

Q: Why did the Department accept a two-month sample for a six-year audit?
A: Because the taxpayer's own records were incomplete, § 58.1-618 authorizes the Department to use the best information available — here, the two months with the most complete documentation, extrapolated across the full period.

Q: Could the taxpayer have avoided this by proving it was "mostly" real-property repair?
A: Yes, in principle — but under § 58.1-205 the burden was on the taxpayer to prove that with evidence, and its incomplete records meant it couldn't.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-610 — contractors deemed to purchase tangible personal property for their own use/consumption
• 23 VAC 10-210-410 B — consuming contractor who also sells at retail must register
• 23 VAC 10-210-410 E — dual-role fabricators follow the primary purpose rule
• Va. Code § 58.1-624 — direct payment permit
• Va. Code § 58.1-633 A; 23 VAC 10-210-470 — dealer recordkeeping requirements
• Va. Code § 58.1-618 — best information available when records are inadequate
• Va. Code § 58.1-205 — assessment is prima facie correct; burden on the taxpayer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-26

Original ruling text

February 18, 2025

Re: § 58.1-1821 Application: 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 period February 2013 through June 2019.

FACTS

An audit was conducted on the books and records of the Taxpayer for the period at issue. The auditor concluded that the Taxpayer was a metal fabricator that provided sheet metal construction, blacksmithing, and metal roofing. The Taxpayer had not filed sales and use tax returns and its records were incomplete. As such, the auditor used a sample for two months in which it had the most complete records to determine taxable purchases and sales and issued an assessment for untaxed sales. The Taxpayer filed an application for correction contending that it is in the business of repairing real property.

DETERMINATION

The Taxpayer contends that it only repairs real property and is therefore a service provider that is not liable for collecting and remitting sales tax. The Taxpayer makes gates, fencing, and railings that are then installed into real property. Further, it creates artwork, historic restorations, and reproductions. Based on the facts in this case, the Taxpayer was fabricating property for both retail sale and for its own use as a consuming contractor. Under these operating conditions, the Taxpayer would be considered to be a dual operator.

Contractors

For retail sales and use tax purposes, Virginia Code § 58.1-610 provides that businesses that contract to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon are deemed to have purchased all tangible personal property for use or consumption in the performance of such contract. Tile 23 of the Virginia Administrative Code (VAC) 10-210-410 B provides that a consuming contractor who also sells tangible personal property at retail must obtain a certificate of registration and may purchase tangible personal property under a resale certificate if it knows at the time of purchase that the property will be resold.

Dual Operators

Title 23 VAC 10-210-410 E addresses fabricators who operate in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for their own use and consumption in the performance of real property construction contracts. This regulation provides that dual role fabricators must follow the primary purpose rule based on gross receipts in determining sales and use tax application.

For the purposes of sales and use tax application, the primary purpose rule as applied to a dual capacity operator is as follows:

• If most of the gross receipts result from a fabricator’s sales or resales, it would purchase materials exempt from tax by submitting an appropriate exemption certificate to its vendors and would collect and remit the tax based upon the total amount for which the tangible personal property is sold. When the fabricator withdraws tangible personal property from its inventory for use and consumption in the performance of real property construction contracts, it would accrue the tax based on the fabricated cost price of the inventory withdrawn and remit the use tax with its sales and use tax return.

• If most of the gross receipts result from fabricating products for its own use and consumption in real property construction, a fabricator would pay sales tax on all materials at the time of purchase to all suppliers that are authorized to collect the tax. In addition, a fabricator would also be required to register, collect, and pay the tax on the retail selling price of the fabricated products sold regardless of whether tax had already been paid to a supplier. The fabricator would be permitted to purchase exempt from the tax only those materials that could be identified at the time of purchase as purchases for resale.

• If the primary purpose cannot clearly be determined based on gross receipts or materials are purchased under circumstances where it is impossible to determine the manner in which such materials would be used at the time of sale, a fabricator may apply to the Department to pay any tax directly to the Commonwealth. See Virginia Code § 58.1-624 concerning direct payment permits.

Because the Taxpayer’s books and records are incomplete, it is unclear whether the majority of items fabricated were tangible personal property for resale or used or consumed in building or installation for customers.

Documentation

The Taxpayer provided paper invoices for some of its transactions, but indicated work was also done by word of mouth. The lack of complete records resulted in the auditor selecting two sample months that included the most documentation.

Virginia Code 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, and purchases. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due, and “such other pertinent information as may be required by the Tax Commissioner.” This record keeping requirement is further explained in Title 23 VAC 10-210-470, which promulgates:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include:

a) A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use;

b) A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase;

c) A record of all deductions and exemptions claimed in filing sales or use tax returns, including exemption and resale certificates, returned or repossessed goods, and bad debts;

d) A record of all tangible property used or consumed in the conduct of the business;

e) A true and complete inventory of the stock on hand and its value, taken at least once each year.

Pursuant to Virginia Code § 58.1-618, the Department is authorized to use the best information available to determine whether a tax liability exists in instances where the taxpayer does not provide adequate records for review during the Department’s audit.

Because the Taxpayer fabricated tangible personal property for retail sale and as a consuming contractor, the auditor had to determine the amount of sales attributable to both tangible personal property sales and real property installation. Lacking complete records, the auditor made the decision to divide the proceeds equally between taxable and nontaxable proceeds. The auditor also increased sales for the sample month of March 2013 to reflect the Taxpayer’s financial statements. For the sample month of March 2016, invoices to customers exceeded the Taxpayer’s recorded sales and the auditor made no reconciliation adjustment in the audit. In addition, no exemption certificates were provided from customers. Further, the few purchase invoices provided did not show that any sales tax was collected. Accordingly, taxable sales and purchases were extrapolated based on the two sample months.

CONCLUSION

Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon a taxpayer to show that the assessment is in error. The Taxpayer has not provided evidence that its business was limited to real property repair. As such, the auditor appropriately conducted their examination based on the information available and the assessment is upheld. 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 30 days from the date of this letter.

The Code of Virginia sections and regulations 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 Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3264.B

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