Virginia Ruling Addresses New One-Time Sales Tax Relief for Real Property Contractors

By: Betsy Goldstein, SALT Senior Manager

At a glance

• The main takeaway: Virginia published a ruling addressing the tax owed by a real property contractor that had mistakenly treated itself as a retailer for sales tax purposes, and the state’s newly-enacted legislation that provides one-time sales tax relief to contractors who find themselves in a similar position.
• Assess the impact: While this is good news for contractors in Virginia, not all states may be as forgiving, so it is important to review each state’s sales and use tax laws.
• Take the next step: Aprio’s State and Local Tax (SALT) team can navigate your company through state sales tax rules and how they apply to your transactions.

Schedule a free consultation today to learn more!

The full story

Sales and use tax rules can be complicated for businesses engaged in real property contracting partly due to the fact that the rules deviate from traditional sales tax compliance. Whereas businesses that sell taxable goods and/or services collect and remit sales tax from their customers and can purchase inventory without paying sales tax (i.e., a sale for resale), real property contractors are typically required to pay tax on their purchases of materials used in the performance of a construction project and do not collect sales tax from their customers.

So, what happens if a real property contractor mistakenly purchases materials without paying sales tax and then charges its customers sales tax instead? During an audit, the state may still assess for the unpaid sales tax on the purchased materials even though the contractor collected and remitted tax from its customer since those are distinct transactions. Ideally, the contractor would want the collected tax to offset the amount of tax it owes on its purchases, but that may not be permitted.

This is the issue addressed in a recent Virginia tax ruling which also explains the state’s new one-time relief for contractors who find themselves in this situation.[1]

A closer look at the case

In this ruling, the Virginia Department of Revenue (Department) audited a real property contractor (Taxpayer) that had mistakenly treated itself as a retailer for sales tax purposes. The Department assessed tax on the materials purchased by the Taxpayer where sales tax was not paid to the vendor. The Taxpayer argued that not allowing a credit against the assessment for the sales tax that the Taxpayer collected from its customers and remitted to the state created an inequitable result.

Historically, the Department has typically not allowed a credit to taxpayers who erroneously collected sales tax from customers instead of paying tax on purchases. The Department’s view was that providing a credit would allow taxpayers to avoid their financial responsibility to pay the tax due on purchases and instead allow them to satisfy this obligation with tax payments erroneously collected from their customers.

The one-time sales tax relief explained

However, on March 20, 2024, Virginia Governor Youngkin signed legislation providing one-time relief that allows contractors a credit for erroneous sales tax collections from customers, again a use tax assessment made by the Department.[2] The new provision, effective July 1, 2024, provides that:

Upon the application of a taxpayer, if the Department determines that a taxpayer has erroneously remitted retail sales tax payments to the Department with respect to a transaction under § 58.1-610 and for which the Department has made a use tax assessment, and such taxpayer has not so requested, the Department shall apply the erroneously remitted retail sales tax proceeds to a use tax assessment of the taxpayer for the same transactions. To be eligible, the taxpayer shall provide evidence of the erroneously paid retail sales tax amount collected and remitted in each transaction. However, in no case shall any taxpayer apply for and receive the relief described in this subsection if he has previously applied for and received the relief described in this subsection, or in the case of a false or fraudulent action by the taxpayer with the intention of evading the tax.

The Department has issued guidance under Virginia Tax Bulletin 24-3 which provides more detail on the new law. As expected, there is certain documentation that a taxpayer must be able to provide to auditors in order to receive the credit. A contractor must clearly show that the property included in the 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.

Taxpayers who have been assessed prior to July 1, 2024 (as was the case here), may request an offer in compromise request on Form OIC B-2 to initiate a review to receive a credit, or can submit a refund request following the Retail Sales and Use Tax Refund Claim Procedures on the Department’s website. A contractor can either receive a credit or a refund, but not both, on the same transaction.

The bottom line

While this is good news for contractors in Virginia, not all states may be as forgiving, so it is important for contractors to review each state’s sales and use tax laws separately. In particular, business need to make sure they understand whether they will be treated as a real property contractor or as a retailer and installer of tangible personal property. 

Aprio’s SALT team has significant experience navigating companies through state sales tax rules, especially how those rules apply to real property contractors. We can assist your business in understanding how sales tax will apply to your transactions, so that you comply with each state’s sales tax requirements and do not incur unexpected state tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.   

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[1] Virginia Rulings of the Commissioner P.D. 24-97 (September 25, 2024).
[2] Virginia Chapters 113 and 128 as codified at Va. Code § 58.1-1812(C).