I'm a contractor who charged my customers sales tax on real-property installation jobs but should have paid use tax on my own materials. Can Virginia give me credit for the sales tax I already remitted?

Plain-English summary

A company that sells and installs garage doors was audited for June 2018 through May 2021 and assessed consumer use tax on materials it bought and consumed on its Virginia installation jobs. Here's the underlying rule that tripped it up: a contractor who installs and annexes tangible property into real estate is treated as the user and consumer of that property, so the contractor owes use tax on its own purchases and does not charge sales tax to the customer. This company had it backwards — it charged, collected, and remitted sales tax to its customers on those jobs. The Department assessed the use tax it should have paid, and the taxpayer objected that being hit with use tax when it had already remitted sales tax on the same property was inequitable.

The 2024 relief provision. A law effective in 2024 (Va. Code § 58.1-1812 C, explained in Virginia Tax Bulletin 24-3, published as P.D. 24-64) addresses exactly this situation. When a contractor erroneously charges, collects, and remits sales tax on property it installs and annexes into realty, and that same property is rightly subject to a use tax assessment, the Department will allow a one-time credit for the erroneously remitted sales tax against the use tax assessment. Key limits:

• First offense only — meaning the first time the issue is identified on audit.
• The contractor must clearly show the sales-taxed property is the same specific property that was incorporated into realty and subject to the use tax.
• No credit if the contractor already received such a credit before, or in cases of fraud or intent to evade.
• A contractor cannot get both the § 58.1-1812 C credit and a sales-tax refund on the same transaction.

How the credit is administered depends on timing:

• Audits completed on or after July 1, 2024: the audit staff determine the amount of the credit. They need the contractor's complete purchase and sales records to verify it (if records are incomplete, they'll work out alternative verification). They also extend the credit forward to cover all periods in which the contractor kept erroneously collecting sales tax.
• Assessments made before July 1, 2024: the contractor initiates the process by filing an offer in compromise on Form OIC B-2, providing matched purchase/sales records and return detail.
• Refund alternative: a contractor can instead get a refund of the erroneous sales tax if it can show the tax was actually refunded or credited to the Virginia customer (following the Department's refund-claim procedures).

Result here. Because the taxpayer filed its correction request before VTB 24-3 issued but requested a credit in the manner the new law permits, the Commissioner sent the audit back to field staff to review eligibility for the one-time credit and adjust the assessment. The credit will be extended forward to periods after the audit until the date the taxpayer fixed its accounting system to comply, or the last day of the month after the revised audit is completed — whichever is earlier (this is not an expansion of the audit period). A revised bill will issue with interest to date, and no further interest accrues if paid within 30 days. Going forward, the taxpayer must pay sales tax to its vendors or accrue and remit use tax directly on materials it consumes — and no such credit will be available in future audits.

What this means for you

Real-property contractors (and anyone who installs materials into buildings/land)

Know which side of the line you're on. If you install and annex materials into real property, you are generally the consumer — you owe use tax on what you buy and you do not charge your customer sales tax. Charging customers sales tax on those jobs is the classic error this ruling addresses. It's fixable once: the first time an audit catches it, you can credit the sales tax you wrongly remitted against the use tax you owe. But it is a one-time grace — after that, an audit will assess the use tax with no offset, so correct your billing and accrual now.

Contractors already facing a use tax assessment

If you erroneously collected and remitted sales tax on the same property, ask about the § 58.1-1812 C credit. For assessments dated on or after July 1, 2024, the auditor should compute it — have your complete matched purchase and sales records ready. For assessments before July 1, 2024, file Form OIC B-2. Alternatively, if you actually refunded or credited the tax back to your customer, you can pursue a sales-tax refund instead — but you can't double-dip with both the credit and the refund.

Accountants and tax preparers

This is a narrow, taxpayer-favorable fix, not a loophole: one offense, same-property matching required, no fraud, and it's mutually exclusive with a refund. Advise contractor clients to set up correct use-tax accrual so they never need it — and if a client qualifies, gather the matched purchase/sales documentation up front, because both the credit and the refund route turn on proving the sales-taxed property is the property annexed into realty.

Common questions

Q: As a contractor, do I charge my customers sales tax or pay use tax?
A: When you install and annex materials into real property, you're the consumer of those materials — you owe use tax on your purchases and don't charge the customer sales tax. Charging customers sales tax on real-property jobs is the mistake this ruling corrects.

Q: I already remitted sales tax on those jobs. Do I have to pay the use tax too?
A: Not necessarily twice. Va. Code § 58.1-1812 C allows a one-time credit for the erroneously remitted sales tax against your use tax assessment — for the first offense identified on audit — if you can show the sales-taxed property is the same property annexed into realty.

Q: How do I claim the credit?
A: For audits completed on or after July 1, 2024, the audit staff compute it (bring complete matched purchase and sales records). For assessments before July 1, 2024, file an offer in compromise on Form OIC B-2. Or, if you refunded/credited the tax to your customer, pursue a sales-tax refund instead — but not both on the same transaction.

Q: Can I rely on this credit every year?
A: No. It's a one-time credit for the first offense. Once you've been caught and corrected, future audits will assess the use tax with no offset, so fix your billing and accrual going forward.

Citations and references

Statutes:

• Va. Code § 58.1-1812 C — one-time credit for a contractor's erroneously collected and remitted sales tax against a use tax assessment on the same property
• Va. Code § 58.1-1821 — application to the Tax Commissioner for correction of an assessment

Guidance and authorities (described here, not linked): Virginia Tax Bulletin 24-3, published as P.D. 24-64 (July 1, 2024), which explains the new § 58.1-1812 C credit; and prior public documents on contractors as consumers of the property they annex into realty (e.g., P.D. 91-141, 93-23, 00-158, 03-87, 07-68, 07-135, 09-177, 22-56).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-90-0

Original ruling text

June 25, 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 June 2018 through May 2021.

FACTS

An audit was conducted on the books and records of the Taxpayer, a seller and installer of garage doors, for the period at issue. As a result of the Department’s audit, an assessment of consumer use tax was issued for untaxed purchases of tangible personal property consumed during the provision of contracted services in Virginia. The Taxpayer filed an application for correction, contending that it was assessed use tax on tangible personal property provided in transactions for which it charged, collected, and remitted sales tax from its customers. 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 inequitable result.

ANALYSIS

Virginia Code § 58.1-1812 C 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.

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 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.

DETERMINATION

The Taxpayer, which purchased and consumed tangible personal property in its real property installation contracts, erroneously charged, collected, and remitted sales tax on these contracts during the audit period. 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. 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 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 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.

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 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 **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4382.B

Related Documents

91-141

93-23

00-158

03-87

07-68

07-135

09-177

22-56

24-3