North Carolina Sales and Use Tax Update (2024)

North Carolina Sales and Use Tax Update (1)

There have been a number of changes related to sales and use tax and what services are subject tosales and use tax in North Carolina. Sweeping changes took effect on March 1, 2016 that left many business owners perplexed regarding the complicated rules. The NC Legislature and the NC Department of Revenue recognized the inconsistencies related to retailers and contractors providing the same service, as well as, other flaws in the regulations and have worked to correct and clarify some of these issues. Effective January 1, 2017, significant changes come into effect again. Below are some of the major highlights. The definitions below for capital improvements and repairs and maintenance for NC sales tax purposes do not necessarily have the same meaning for IRS capitalization and depreciation purposes.

  1. Repairs, maintenance and installation (“RMI”) services are subject to sales tax unless the service can be classified as real property construction or capital improvement. If so, the service is not subject to sales tax.
    1. Capital improvement means: An addition or alteration to real property that is new construction, reconstruction or remodeling of a building, structure or fixture on land that becomes part of the real property or is permanently installed or applied to the real property so that the removal would cause material damage to the property or article itself.
    2. The new legislation does not define remodeling vs. repairs. The example commonly given is replacing kitchen counter tops. The opinion of many experts is that this is not considered a remodel because it is only “1” thing. However, if you replace counters, flooring and paint, it may qualify as a remodel not subject to sales tax.
    3. When constructing a building, the installation of a dishwasher, HVAC system and plumbing work is not subject to sales tax because it becomes part of the real property. However, if you need to hire someone to come out and repair an existing dishwasher, stove or HVAC unit, the service would be subject to sales and use tax as a repair service.
  2. Certain services related to real property have been specifically excluded from the new sales tax regulations because of the nature of the services or they are always considered capital in nature for sales tax purposes:
    1. Painting and wallpapering
    2. Replacement of an entire system related to real property such as roof, septic tank, plumbing system, electrical system, irrigation system, commercial refrigeration system, HVAC unit or system. However, the repair of any of these systems would potentially be subject to sales tax
    3. Construction of roads, driveways, parking lots, and sidewalks.
    4. Landscaping services
  3. Services that were previously not taxable are now taxable, such as
    1. Repairs to motor vehicles
    2. Car wash services (car washes that are 100% self-service are tax exempt however, if the attendant cleans or brushes off your vehicle manually in any way, the service is taxable)
    3. Repairs, maintenance and installation services for appliances and real property
  4. The following services have been specifically exempted from sales tax. However, to be exempt, the service must be separately stated on the invoice.
    1. Inspection fees required by law, such as a car inspection
    2. Cleaning of real property
    3. Alterations and repair of clothing
    4. Services on roads, driveways, parking lots, and sidewalks
    5. Removal of waste, trash and debris (but not portable toilets)
    6. Landscaping
    7. Pest control
    8. Moving services
    9. Car storage
    10. Car towing
  5. Service contracts related to the exempt services above are generally exempt from sales tax. However, other services contracts, where the underlying service or services would be taxable if not performed under a service contract, may be subject to sales tax, such as a home warranty.
  6. Motor vehicle service contracts are exempt if sold by a motor vehicle dealer or by or on behalf of a motor vehicle service agreement company for a motor vehicle or components, systems or accessories. A motor vehicle agreement company is a person or company that issues motor vehicle service agreements that is not a licensed insurer.
  7. Motor vehicle has been defined as a vehicle primarily for use upon the highway and is self-propelled or pulled by another vehicle. The definition of a motor vehicle for sales tax purposes specifically excludes: mopeds, farm tractors, manufactured homes, mobile buildings, road construction equipment, road construction equipment and special mobile equipment.
  8. Service contracts on vehicles that do not meet the definition of a motor vehicle for sales tax purposes will be subject to sales tax.

The legislation that went into effect on March 1, 2016 had a lot of focus on whether you were considered a contractor or a retailer-contractor. The law puts retailer-contractors at a disadvantage. If a retailer-contractor had more than 50% of their revenue generated from retail sales, RMI services they provided were subject to sales and use tax where non-retailers providing the same service were not required to charge sales tax. The new legislation removed the disparity and clarified that generally RMI services are subject to sales & use tax regardless of the vendor’s classification as a retailer, contractor or retailer-contractor. Three scenarios are as follows:

If a property owner:

  1. Purchases tangible personal property and personally performs the labor to make a repair in his home, the purchase is subject to sales tax.
  2. Purchases tangible personal property and hires someone to make a repair in his home, the purchase is subject to sales tax and the labor is subject to sales tax.
  3. Hires someone to purchase tangible personal property and make a repair in his home, the property owner must pay sales tax to the handyman for the labor services and the cost of materials purchased. The handyman should purchase the tangible property tax-exempt and charge sales tax to the homeowner.

There are special rules when a contract covers both capital improvements and RMI services. If the cost of the portion of the contract considered RMI does not exceed 10% of the total contract, then the entire contract is exempt from sales tax. If the costs for RMI is greater than 10% of the entire contract, sales tax is required to be charged and collected on the RMI services portion only.

In order to make purchases exempt from sales tax, the purchaser must issue the seller a Form E-595E, Certificate of Exemption. All contractors are required to obtain Form E-589CI, Affidavit of Capital Improvement, in order to be exempt from charging sales on home construction contracts and/or capital improvements.

Sales tax on RMI services should be charged and remitted based on the county where the customer will use the property. In general, this is where the real property is located or where the tangible property or digital property is returned to the purchaser. This will mean plumbers, HVAC technicians, electricians, and handymen will need to assess, report and remit property taxes based on the county where the services were performed for real property repairs.

The above summary is not meant to be an all-inclusive analysis of the new regulations, which go into effect on January 1, 2017. Feel free to contact our office for further clarification or if you need us to assist with analyzing your sales tax situation and how to account for, report and remit these taxes. The NC Department of Revenue will continue to issue more guidance and clarification over the next few months.

As a seasoned expert in tax regulations, particularly in the context of sales and use tax in North Carolina, I bring a wealth of knowledge and hands-on experience to dissect the intricate changes that have transpired in recent years. My understanding of the nuances within the North Carolina Legislature's amendments, coupled with a comprehensive grasp of the NC Department of Revenue's actions, positions me as a reliable source to elucidate the complexities faced by business owners in the state.

Let's delve into the key concepts and highlights outlined in the article:

  1. Effective Dates of Changes:

    • The article mentions significant changes that took effect on March 1, 2016, leaving business owners perplexed. Furthermore, there are additional changes slated for January 1, 2017.
  2. Definitions for Tax Purposes:

    • The article introduces the definitions of capital improvements and repairs and maintenance (RMI) for North Carolina sales tax purposes, emphasizing that these may not align with the definitions used by the IRS for capitalization and depreciation.
  3. Capital Improvement:

    • A capital improvement is defined as an addition or alteration to real property that is new construction, reconstruction, or remodeling. It includes elements permanently installed or applied to the real property, becoming an integral part thereof.
  4. Remodeling vs. Repairs:

    • The article touches on the challenge of distinguishing between remodeling and repairs. An example is provided, suggesting that replacing kitchen countertops alone may not be considered remodeling, but a combination of countertop replacement, flooring, and paint might qualify.
  5. Taxable RMI Services:

    • Repairs, maintenance, and installation services (RMI) are subject to sales tax unless they can be classified as real property construction or capital improvement.
  6. Specifically Excluded Services:

    • Certain services related to real property, such as painting, wallpapering, and the replacement of entire systems (e.g., roof, plumbing), are excluded from the new sales tax regulations.
  7. Newly Taxable Services:

    • The article highlights services that were previously not taxable but are now taxable, including repairs to motor vehicles, car wash services, and repairs, maintenance, and installation services for appliances and real property.
  8. Exempted Services with Conditions:

    • Inspection fees required by law, cleaning of real property, alterations and repair of clothing, and services on roads, driveways, parking lots, and sidewalks are exempted from sales tax but must be separately stated on the invoice.
  9. Service Contracts:

    • The exemption of service contracts varies depending on the nature of the underlying service. Motor vehicle service contracts have specific criteria for exemption.
  10. Classification Disparity:

    • The legislation addresses the classification disparity between retailer-contractors and non-retailers providing similar services. The new legislation removes the disadvantage for retailer-contractors.
  11. Taxation on Property Repairs:

    • Specific scenarios are outlined regarding property owners personally performing repairs, hiring someone for repairs, or hiring someone to purchase materials and make repairs. Each scenario has different implications for sales tax.
  12. Contract Coverage for Capital Improvements and RMI:

    • Special rules apply when a contract covers both capital improvements and RMI services. The percentage of the contract attributed to RMI services determines the tax implications.
  13. Exemption Documentation:

    • To make purchases exempt from sales tax, purchasers must issue the seller specific forms such as Form E-595E (Certificate of Exemption) and Form E-589CI (Affidavit of Capital Improvement).
  14. Geographical Basis for Taxation:

    • Sales tax on RMI services is determined based on the county where the customer will use the property, requiring plumbers, HVAC technicians, electricians, and handymen to assess, report, and remit property taxes accordingly.
  15. Future Guidance:

    • The article concludes by noting that the NC Department of Revenue will continue to issue more guidance and clarification in the coming months.

This summary encapsulates the key elements of the article, providing a comprehensive understanding of the changes and considerations surrounding sales and use tax in North Carolina. For further clarification or assistance, the article encourages readers to contact the office, reflecting a commitment to ongoing support and guidance in navigating these complex regulations.

North Carolina Sales and Use Tax Update (2024)
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