New Sales Tax Rules

Major changes in North Carolina Sales and Use tax rules become effective March 1, 2016 as the North Carolina sales and use tax begins to apply to certain repair services and service contracts.  The North Carolina Department of Revenue (NCDOR) has been busy during February issuing Directives and Notices to provide guidance as to exactly how these new rules will be applied.  The NCDOR began sending information by both regular mail and email to North Carolina businesses on February 11.  Whether you are a business who will have to comply with the new rules, or a taxpayer who may find yourself paying tax on services you are not accustomed to, we wanted to provide you with key information on these upcoming changes.

Historically, sales tax has been charged on the purchase of personal property, but not on services.  Sales tax laws were first enacted when our economy was primarily product based.  As the economy has moved more and more towards being service-based, it is not surprising that states are observing that a significant portion of retail spending is no longer subject to sales tax.  Accordingly, more and more states are beginning to tax services.  North Carolina is joining that movement effective March 1, 2016, albeit at least for now on a fairly limited basis.

Here are the highlights of the changes to be effective March 1, 2016.  I apologize in advance for the technical nature of the explanations that follow.

  • Sales tax will apply to repair, maintenance, and installation (RMI).  RMI services are those made to troubleshoot or keep personal property in working order, to calibrate or restore personal property, or to install personal property.
  • There are two important exceptions to the application of the new tax. Sales tax does not apply to RMI services performed by:
    • A person whose only business activity is to provide RMI services. Note that if a business also sells parts or products in conjunction with making repairs (e.g. a typical auto repair shop), this exception does not apply.
    • A person whose business activity is primarily performing real property contracts. Such contracts include any services with respect to real property contracts, including selling personal property to be installed to become part of real property if the business provides the labor to install such property.  Common examples include HVAC contractors or plumbers.
  • It should be noted that if the primary business activity of a business is retail sales, then the business must charge sales tax on its real property contracts to repair or install personal property. Common application here might be Lowes, Home Depot or other such retailers who also perform real property contracts.
  • The sale or renewal of service contracts sold at retail after March 1, 2016 will be subject to sales tax. This is true even if the property covered becomes a part of real property.  This tax also applies to service contracts sold by businesses qualifying for one of the two exceptions from sales tax on RMI services as described above.
  • It should be noted that if a business sells personal property that is exempted from sales tax (e.g., a real property contractor as described above); the business should pay sales tax on the purchase of the property to be installed. If the business is not charged sales tax on the purchase, it is liable to pay use tax on the property.

This is just a broad overview of the new North Carolina sales tax rules on certain services.  There are exceptions and other technicalities not covered here.  If you have questions about how the new rules apply to your business, please give us a call and we will be glad to assist you.

Ken Martin