Rulings of the Tax Commissioner

October 23, 2024

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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period August 2017 through June 2020. 

FACTS

The Taxpayer, a fabricator of septic tanks, was audited for the period at issue. Under a first-generation audit, the auditor found that the Taxpayer was not charging sales tax on its retail sales of septic tanks made without installation, resulting in an assessment for tax and interest due on the untaxed sales. The auditor instructed the Taxpayer to seek a refund of any taxes improperly paid on its purchases. 

The Taxpayer filed an application for correction contending that it should be treated similarly to the rest of the home construction industry and consistent with the prior advice it received from the Department. The Taxpayer argues that it would be almost impossible to request refunds of the tax paid on its purchases directly from its vendors. The Taxpayer also claims that it was orally advised to pay tax on its purchases, rather than collect tax from its customers on its sales.
 
DETERMINATION

Fabrication

Title 23 of the Virginia Administrative Code (“VAC”) 10-210-410 C states the following regarding fabricators that fabricate and sell tangible personal property to customers:

A person who fabricates tangible personal property and sells it to customers, including contractors, for use or consumption by them, must add the sales tax to the sales price and collect it from the customer for payment to the state. Raw materials, component parts, and other tangible personal property to be fabricated for sale may be purchased under a resale certificate of exemption.

During the audit, the auditor concluded that the Taxpayer did not install the septic tanks into real property. Rather, it delivered the septic tanks to job sites and placed the tank in a hole, which was dug by a separate entity. The Taxpayer’s customers (i.e., contractors) installed the septic tanks after the property was delivered. 

The Taxpayer believes its activity constituted installation. However, the Department has held that the term “install” means “[t]o set up or fix in position for use or service.” See Public Document (P.D.) 98-12 (1/20/1998). The Taxpayer’s activity of placing a tank into a prepared hole fails to satisfy the requirements of affixing such tank for use or service as a septic system. Instead, the purchasers that hooked the tank to the system were the installers. Thus, contractors, not the Taxpayer, were the end users or consumers of the septic tanks. Because the Taxpayer sold septic tanks without installation, it is considered to be a retailer required to collect and remit tax on its retail sales. 

Refund or Credit of Tax Paid

Pursuant to Title 23 VAC 10-210-410 C, the Taxpayer was entitled to use a resale exemption certificate to make tax-free purchases of property that would be fabricated and resold. The Department’s policy with respect to refunds of sales taxes erroneously paid to vendors is addressed in the Retail Sales and Use Tax Refund Claim Procedures (the “Procedures”), which are available on the Department’s website. Taxpayers are required to request a refund from the dealer that made the sale to prevent misallocations of the local sales tax and to take into account any dealer’s discount that may have been taken on the return filed by the dealer. Dealers are required to refund sales tax erroneously collected on transactions exempt or not subject to the tax directly to the customer when requested to do so by the customer, except in certain very limited situations. Only when a dealer is unable to provide a refund or credit of the tax can a taxpayer submit a refund claim with the Department. Any refund issued by the Department is generally reduced by the dealer’s discount.

Because the Taxpayer improperly paid the retail sales and use tax when it purchased materials and supplies needed for its fabrication process, the auditor provided information regarding requests for a refund of the taxes from vendors pursuant to the Procedures. The Taxpayer argues that the refund procedure is unreasonably burdensome because obtaining refunds directly from its vendors is almost impossible. As indicated above, however, these requirements are necessary to maintain the integrity of the distribution of the local portion of the tax and account for any discount claimed by a dealer.

In limited circumstances, the Department has agreed to grant a credit against an audit assessment rather than having a taxpayer separately request a refund of the erroneously paid tax. In Public Document (P.D.) 17-115 (6/29/2017) and P.D. 18-10 (2/2/2018), the Department permitted a credit in an audit for sales taxes paid to vendors on tangible personal property purchased for resale only after providing evidence that tax was paid to the vendors on purchases that otherwise would have qualified for the resale exemption and that the vendors could not or would not issue a refund directly. The Taxpayer has not provided any evidence to show that it attempted to request a refund directly from its vendors, experienced undue hardship while attempting to request a refund from its vendors or was refused a timely requested refund by its vendors. 

Previous Advice

The Taxpayer states that it called the Department in 2017 to inquire about its responsibility to collect sales tax. Based on this conversation, the Taxpayer claims that it was advised not to charge sales tax on its sales in accordance with Title 23 VAC 10-210-410, which provides guidance regarding the sales and use tax application to transactions involving contractors. 

Virginia Code § 58.1-1835 provides that the Department must abate any portion of tax, interest, and penalty attributable to erroneous written advice by the Department under the following conditions:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
3. The facts of the case described in the written advice and the request therefor are the same, and the taxpayer’s business or personal operations have not changed since the advice was rendered.

Without full knowledge of the facts presented by a taxpayer and the specific advice provided orally by a representative, the Department is unable to determine whether such taxpayer could have reasonably relied on the advice that resulted in the assessment. In considering any verbal advice given, there is always a chance that the facts provided are insufficient, imprecise, or misunderstood resulting in an inaccurate response. 

In its application for correction, the Taxpayer indicated that it was fabricating and installing septic tanks. If this was how it was characterized during a phone conversation, the Department’s representative may have logically assumed the Taxpayer was a contractor and provided the advice indicated. Under audit, however, after a complete review of the nature of the business operations, the Department found that the Taxpayer was not installing the systems and correctly treated its activities as a fabricator making retail sales. Both the auditor and the representative may have provided accurate advice based on the information available to them.

CONCLUSION

Based on the facts in this case, the Taxpayer made retail sales of fabricated tangible personal property without charging, collecting, or remitting the required sales tax. Further, the Taxpayer is not entitled to a refund or credit for taxes paid on its purchases and is not entitled to accommodation based on any advice it previously received from the Department. Accordingly, the auditor was correct to include the Taxpayer’s untaxed sales as exceptions in the audit, and the audit assessment is upheld. 

The Taxpayer will receive an updated bill with accrued interest to date. The Taxpayer should remit the amount due within 30 days of the date on the updated bill to avoid the accrual of additional interest and possible collection action. 

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 Department’s Office of Tax Policy, Appeals and Rulings, at (804) ***** or via email at *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/3766.C