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