Rulings of the Tax Commissioner

April 23, 2025

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

Dear *****:

This will respond to your letter in which you protest the Department’s denial of a retail sales and use tax refund for the periods September 2016 through May 2018 filed on behalf of ***** (the “Taxpayer”). 

FACTS

The Taxpayer requested a refund of sales tax on transactions it believes were exempt from tax. Specifically, the Taxpayer purchased heating, ventilation, and air conditioning (HVAC) equipment and supplies from ***** (the “Vendor”) and the Vendor charged sales tax on the transactions. The Taxpayer only provided invoices from the Vendor, but was unable to provide any contracts substantiating the provision of installation services.

Based on the information available, the Department’s auditor concluded that a third-party contractor installed the HVAC systems that were purchased from the Vendor and that sales tax was properly charged on the transactions. Accordingly, the auditor denied the Taxpayer’s refund request. The Taxpayer filed an application for correction, contending that the transactions with the Vendor were for the purchase and installation of HVAC systems and should not have been subject to sales tax.

ANALYSIS

Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Thus, it is incumbent on the consumer making the claim to prove that a dealer erroneously charged and collected tax on a transaction. The Taxpayer asserts that the Vendor was operating as a contractor with regard to the transactions at issue.

Contracting

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. Title 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. The sale and installation of the HVAC systems is generally considered to transform otherwise tangible personal property into real property. See Public Document (P.D.) 12-19 (3/5/2012), P.D. 17-157 (9/8/2017), and P.D. 23-8 (1/18/2023).

The Department’s auditor found that a third-party contractor installed the HVAC systems at issue instead of the Vendor. The information available indicated that the Vendor did not perform the installation services. Because the Vendor acted as a retailer by charging the Taxpayer sales tax, the auditor concluded that the transactions between Taxpayer and the Vendor for the sale of HVAC equipment and supplies were taxable sales of tangible personal property. The Taxpayer counters that the Vendor installed the equipment and therefore was the consuming contractor liable for paying use tax. However, the Taxpayer has failed to provide any contracts or agreements with the Vendor for the transactions at issue demonstrating this assertion. 

Real Property Installation by Subcontractor

Pursuant to Title 23 VAC 10-210-410 A, with regard to real property construction, a contractor is deemed to be the user or consumer of all tangible personal property, regardless of whether such contractor is the prime contractor or a subcontractor. In real estate contracts involving a real property owner, general contractor, prime contractor and a subcontractor, the Department has generally ruled that the ultimate user and consumer of the tangible personal property would be the contractor that performed the installation or affixation work. See P.D. 99-118 (5/19/1999) and P.D. 20-92 (5/27/2020).

Further, Virginia Code § 58.1-625 A makes the sales or use tax the legal debt of the purchaser. Under Title 23 VAC 10-210-410 A, “[i]f a supplier of a contractor doing work in Virginia does not collect the Virginia tax from the contractor, the contractor will be liable for the use tax on the contractor’s purchases from the supplier.” 

Accordingly, while a dealer may be obligated to collect the tax on their sales to a contractor, the Department may look to either the dealer or the consumer for any tax liability. This position has been upheld by the United States District Court for the Western District of Virginia, Roanoke Division when it opined, “[a]lthough the seller is legally obligated to collect the tax from the purchaser, the statute makes the tax the legal debt of the purchaser.” See United States v. Forst, 442 F. Supp. 920, 923 (W.D. Va. 1977), aff’d, 569 F.2d 811 (4th Cir. 1978). Under this statutory construction, the Department may seek payment of the tax from either the dealer or the consumer of tangible personal property.

In the case at hand, the documentation appears to indicate that the Vendor sold equipment to the Taxpayer and separately contracted with a third party that performed the installation. Under these circumstances, the Vendor could have been engaged as the prime contractor and the third party as the subcontractor. As indicated above, the subcontractor, as the user and consumer of the property, would generally be legally considered to be the consumer liable for the tax.

However, instead of acting as the prime contractor, the Vendor apparently considered itself to be a retailer and charged, collected, and remitted the sales and use tax on the HVAC equipment and supplies. As structured, the Taxpayer would be considered to have purchased tangible personal property and provided the same to the contractor performing the installation.

Typically, the only time that a consuming contractor would be subject to use tax when a customer purchases the materials that are used in real property contracting is when a customer is exempt from sales tax. This usually occurs when the purchasing consumer is an exempt organization. See, for example, P.D. 04-207 (11/30/2004) and P.D. 05-159 (10/7/2005). As invoiced, the equipment was purchased by the Taxpayer who paid the sales tax. Because the Taxpayer is not an organization exempt from Virginia sales and use tax liability, unless the Vendor, or a subcontractor of the Vendor, performed the installation, the Taxpayer was liable for the sales tax for the purchase of the HVAC systems. 

Documentation

As indicated above, the Vendor’s invoices indicate that it considered itself to be a dealer of tangible personal property that was required to collect and remit sales and use tax. Virginia Code § 58.1-102 requires taxpayers to maintain suitable records that substantiate information required by the Department. More specifically, under Virginia Code § 58.1-633 A, dealers are required to “keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.”

The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax and that the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a dealer. See P.D. 92-36 (4/23/1992), in which the Department ruled that each purchase or sale transaction exists separately and must be analyzed individually in order to determine how the tax applies.

The information submitted with the application included copies of invoices from the Vendor. Without exception, the invoice data provided shows materials and taxes, but no details for any services. Based on the transactional evidence, the Vendor appropriately added the tax onto the sales of the HVAC equipment and supplies.

Additional post factum communications between the Taxpayer and the Vendor indicate the Vendor was responsible for installing the HVAC systems. However, no contract or agreement or other transactional documentation has been provided that evidence’s the Vendor’s responsibility for the installation of the HVAC systems. 

Refund Procedure

The conflicting information and imprecise documentation confirm the rationale of Virginia’s statutes regarding sales and use tax refunds. Under Virginia Code § 58.1-625 C, any dealer that collects sales or use tax on an exempt or non-taxable transaction is required to remit the erroneously or illegally collected tax to the Department unless the tax has been refunded to the consumer or credited to their account. To assist dealers and consumers seeking refunds or credits, the Department issued retail sales and use tax refund claim procedures (the “Procedures”). In accordance with the Procedures, a dealer must refund sales or use tax erroneously collected on transactions exempt or not subject to the tax directly to the consumer when requested to do so by such customer unless one of the limited circumstances applies:

1. The dealer believes the transaction was properly subject to the tax.
2. The dealer is no longer in business.
3. Refunding the tax would cause an undue financial hardship to the dealer.

The onus of both providing and requesting a refund is placed on the dealer because it should have the most complete understanding of its business operations and practices and be in the best position to accurately document its sales transactions. 

Further, Virginia Code § 58.1-603 imposes the sales tax on, among other transactions, “the gross sales price of each item or article of tangible personal property when sold at retail or distributed within this Commonwealth.” The equipment at issue was, prior to installation into realty, tangible personal property subject to sales and use tax. As such, Virginia is entitled to the tax from the sale or use of the equipment and supplies. Absent any evidence that the sales or use tax was remitted by another entity or as a result of another transaction, the sales tax remitted by the Vendor on the transactions with the Taxpayer are the only sales that satisfy the imposition of the tax under Virginia Code § 58.1-603.

DETERMINATION

The case at hand highlights the difficulty of a consumer applying directly to the Department for a sales and use tax refund. The transactional record fails to support the argument that the Vendor was operating as a contractor in its dealings with the Taxpayer and the contradictory information obtained when the refund request was filed lacks objective scrutiny. Accordingly, the Taxpayer’s request for a refund cannot be granted. 

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 Office of Tax Policy and Legal Affairs, Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.

Sincerely,

Kristin L. Collins
Deputy Tax Commissioner
Commonwealth of Virginia

Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Kristin Collins, Deputy Tax Commissioner, the authority to sign for me any and all rulings, appeals, offers in compromise, and penalty waivers in any instance where a conflict of interest may exist with a taxpayer. This authority shall be in effect from the date signed until revoked.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/3502.B