North Carolinians are accustomed to paying sales tax on the parts and equipment involved in making repairs to their vehicle and homes, but labor costs have always been tax-free. They’re not anymore. Effective today, a new sales taxes will take effect across North Carolina, adding to the cost of services ranging from car repairs to appliance installations.
This additional sales tax was approved last September, part of the newest NC budget that also includes a reduction in personal income taxes.
North Carolina’s sales tax rates range from 6.75 percent to 7.5 percent and vary by county. (In Mecklenburg county, where sales tax runs 7.25%, a car repair that includes $200 in labor fees will now cost $14.50 more.) The additional sales tax revenue collected across the state, estimated to be about $84.8 million, will be distributed to poorer counties and used to fund schools, community colleges, and economic development projects.
Determining which businesses will be taxed is a bit difficult because there are various exemptions (for now, veterinary, pet care, and advertising services are tax-free). However, some rules have been established.
NC Department of Revenue Guidance
The sales tax applies to sales occurring on or after March 1, 2016, and to gross receipts derived from repair, maintenance, and installation services provided on or after that date.
The phrase “repair, maintenance, and installation services” includes the following activities:
- keeping or attempt to keep tangible personal property or a motor vehicle in working order to avoid breakdown and prevent repairs
- calibrating, restoring, or attempting to calibrate or restore tangible personal property or a motor vehicle to proper working order or good condition (this activity may include replacing or putting together what is torn or broken)
- troubleshooting, identifying, or attempting to identify the source of a problem for the purpose of determining what is needed to restore tangible personal property or a motor vehicle to proper working order or good condition
- installing or applying tangible personal property (except for tangible personal property installed or applied by a real property contractor) pursuant to a real property contract
On February 5, 2016, the North Carolina Department of Revenue issued two Directives (SD-16-1 and SD-16-2) in a further attempt to clarify how these new sales and use tax rules would apply to a broad range of taxpayers, such as HVAC contractors, kitchen remodelers, and carpet and flooring installers. Although the Directives' description of the new sales and use rules is somewhat confusing, the NCDOR uses the following examples to clarify:
- For the 2015 calendar year, a person who sells septic tank components at retail locations and installs septic tanks in real property had total revenue of $5 million. Of the $5 million, $4 million was from the retail sale of septic tank components and $1 million was from installation. The person’s revenue is 80 percent from retail sales of component parts. Effective March 1, the person is deemed to be in ‘retail trade’ and is a retailer and must treat all sales as retail sales, even though prior to that the business was permitted to operate as a retailer-contractor.The total sales price of installed septic tanks on or after March 1, 2016 are subject to sales tax in the same manner as the sales price of any components sold at retail.
- For the past three tax years, a person engaged in business in North Carolina sold kitchen cabinets at retail in the State to consumers and also performed kitchen remodeling contracts that primarily included the removal of existing cabinets, site preparation, installing new cabinets, plumbing, fixtures, and countertops at customers’ locations in the State. The cumulative revenue for the three years from sales in the State totaled $2,000,000; consisting of $1,500,000 from kitchen remodeling contracts and $500,000 from retail sales of kitchen cabinets. Based on the three prior tax years, the person received 75% of its revenue from remodeling contracts for real property. This person does not meet the definition of “retail trade” since only 25% of its revenue is from the retail sales of kitchen cabinets. This person is a “retailer-contractor” since the majority of the revenue is from remodeling contracts.
Based on those examples, it’s fair to say that, in order to determine how the new sales and use tax rules apply, the first step is to determine whether the taxpayer meets the threshold test of being a "retailer" (revenue from the sale of service contracts and other retail sales is greater than 50% of total NC revenue). And, once the taxpayer meets the definition of being a "retailer", then that person must collect -- and remit --sales tax on every sale and service that taxpayer makes or provides.
In addition to “non-retailers” (taxpayers whose only business activity is performing repair, maintenance, or installation services, and who otherwise derive less than 50% of revenue from retail sales), other exemptions exist.
A taxpayer who operates solely as a real property contractor will not be subject to sales tax on repair, maintenance, or installation services. A real property contractor that installs tangible personal property onto real property, but does not also sell tangible personal property at retail, will not become a “retailer,” and therefore will not be subject to the change in sales tax.
In addition, repair, maintenance, and installation services specifically exclude installation services performed by a real property contractor pursuant to a real property contract. Thus, even a real property contractor who also makes retail sales of tangible personal property will not be required to pay tax on receipts from installation services performed as part of a real property contract.
Finally, the following repair, maintenance, and installation services will be exempt from sales tax:
- services performed with respect to property (other than a motor vehicle) that is exempt from sales tax
- services purchased for resale
- services used to maintain or repair tangible personal property or a motor vehicle pursuant to a taxable service contract if the purchaser of the contract is not charged for the item
- services and parts provided under dealer or manufacturer warranties (including motor vehicle warranties)
- services performed on certain jet aircraft and jet engines
The overall hope of lawmakers is that this shift in taxes, from income based to consumption based, will produce a more reliable stream of income (albeit less income overall) and prevent the need for budget cuts. Only time will tell. For now, be prepared for a bit more out-of-pocket expense next time you need something fixed, and reach out to us if you’re still questioning whether your business is affected by this new law.