Virginia Sales and Use Tax: Challenges, Changes, and Opportunities for Contractors

New legislation provides some tax relief for contractors

Complying with sales tax laws can be challenging for the average business; however, compliance is even more challenging for contractors who may perform various types of projects/work which have different tax requirements. Different rules may apply depending upon the nature of the work (involving real property v. something that remains tangible upon installation; repairs v. original work; fabrication for ones’ own use (for installation into real property) v. fabricating for resale to others), etc. Read our February 2022 summary of some the Virginia tax requirements of contractors with respect to realty.

In addition, a Virginia law change in 2017 designed to simplify compliance for some contractors went unnoticed by many or if noticed was still confusing and created other compliance issues. We reported on that law change shortly after the legislation enacting the law change was passed. Fortunately for many, though, legislation enacted by the 2024 General Assembly effective July 1 provides some tax relief for contractors if they failed to comply with the 2017 law change.

Overview of the 2017 Virginia law change

Historically, Virginia has considered businesses that sell and install tangible personal property that becomes part of the realty upon installation as the taxable users and consumers of the materials installed. Thus, these businesses paid the tax on their purchases but did not collect sales tax from their customers.  However, a provision of Virginia law treated businesses who met certain criteria and who sold and installed certain types of items, such as fences, window blinds and shades, storm windows and doors, floor coverings (generally flooring that is not permanently attached to the floor beneath), cabinets, countertops, kitchen equipment, window air conditioning units, and similar items, differently. If these businesses sold the above items at retail and provided installation services, they were considered retailers and required to collect the tax on the sales price of the materials sold. Separately state installation charges were not taxed. With the law change, effective July 1, 2017, Virginia considers dealers of the above who sell and install such items as traditional contractors – meaning they, the contractors, must pay sales/use tax on their purchases of materials they install (as well as installation materials). They do not collect the tax from their customers. However, if they are selling the items without installation, they may purchase the items exempt of the tax and then collect the tax from their customers on those sales.

The Department of Taxation clarified in its Tax Bulletin 17-8 the tax responsibilities with respect to both purchases and sales, effective July 1, 2017, of retail merchants who primarily sell the above items but may, on occasion, make installations of such, as well as of contractors that primarily install the items but may on occasion make retail sales without installation. See the chart below but also see the Tax Bulletin for more information and helpful examples.

Note: The 2017 law change did not impact locksmiths and others selling and installing locks and locking devices. These are still considered retailers and may purchase items for resale exempt of the tax but must collect the tax on their sales to customers.

New Virginia tax law change provides one-time special treatment

Effective July 1, 2024, the law allows contractors who erroneously collected sales tax from customers and reported that tax to the Department to have the erroneously remitted tax apply to a use tax assessment (presumably under audit) for the same transaction. Traditionally, the Department of Taxation has not allowed a credit for sales tax collected to be applied to tax due on purchases, or for any sales tax collected in error unless a person could show the tax had been properly refunded to its customer.

Contractor eligibility for special tax treatment

To be eligible for this one-time special treatment, a contractor must clearly demonstrate that the property included in transactions for which sales tax was erroneously collected from customers and remitted was the same specific property for which the contractor himself was liable for the use tax. As noted above, contractors are deemed the taxable users and consumers of tangible property they purchase and install into realty.

A contractor may not apply for and receive the tax relief if had previously applied for and received the same type of relief or in the case of intent to evade or avoid the tax. Contractors who believe that may be entitled to this relief for assessments for periods prior to July 1, 2024, may submit an offer in compromise to the Department.

Additional information regarding this one-time tax relief opportunity may be found in the Department’s Tax Bulletin 24-64.

Please reach out to your Keiter Opportunity Advisor, if you have any questions or need assistance with these or other state and local tax issues.