North Carolina Sales and Use Tax Law Changes

North Carolina Sales and Use Tax Law Change Affecting Real Property Contractors and Repair, Installation, and Maintenance Service Providers

*Note: This article was originally published on January 5, 2017 and may have changed due to the passing of the Tax Cuts and Jobs Act of 2017. 

By Terry Barrett, Senior Tax Manager | State & Local Tax Team

Real property contractors doing business in North Carolina should take note of sales and use law changes, effective 1/1/2017, which may affect the taxability of some of their transactions.  Real property contractors historically have been deemed to be the taxable users and consumers of materials purchased and used by them in fulfilling real property contracts.  In other words, they pay the sales and use tax on the materials when purchased and have not had to collect the tax from their customers. This generally has not changed.

However, effective 1/1/2017, real property contractors performing installation, repair and maintenance work in the state must register for and begin collecting the sales tax on some of those sales.  In addition, a person whose only business activity is providing repair, maintenance, and installation services is considered a retailer by North Carolina and is required to register, collect, and remit sales tax on the repair, maintenance, and installation services sold at retail.

The following provide clarifications of when the tax is due by a contractor (as traditionally has been the case) and when the tax must be collected by a contractor or service provider/retailer from the customer.

New Construction, Remodeling, and Capital Improvements

The tax treatment of new construction, remodeling, and capital improvements does not change – the contractors will remain subject to the tax on their own purchases for use in connection with such projects.  The following are some examples of what constitute “capital improvements” where the old rule applies:

• 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.
• An addition or alteration to real property that is new construction, reconstruction, or remodeling of a building, structure, or fixture on land that is permanently installed to the real property so that removal would cause material damage to the property or article itself.
• An addition or alteration to real property for or by a lessee/tenant that is intended to become a permanent installation and title to it vests in the owner/lessor of the real property immediately upon installation.
• Removal of items from real property, such as debris, construction materials, asbestos, or excavation activities, including the removal of items from a structure such as a dumpster.
• Performance of work that requires the issuance of a permit under the State Building Code, other than repair or replacement of electrical components, gas logs, water heater, and similar individual items that are not part of new construction, reconstruction, or remodeling.
• Installation of underground utilities, notwithstanding that charges for such are included in the gross receipts derived from services subject to the tax.
• Installation of equipment or a fixture that is attached to real property so that removal of the item would cause physical, functional, or economic damage to the property and that is capitalized under one or more of the following: the Internal Revenue Code, Generally Accepted Accounting Principles, or International Financial Reporting Standards.
• Painting or wallpapering.
• Replacement or installation of a roofing, septic tank, plumbing, electrical, commercial refrigeration, irrigation, sprinkler, or other similar system.
• Replacement or installation of a heating, ventilation, and air conditioning unit or system.
• Replacement or installation of roads, driveways, parking lots, and sidewalks.
• Landscaping service.

If the work constitutes real property contract work with respect to a capital improvement to real property, a contractor must issue a Form E-589CI, Affidavit of Capital Improvement, to any subcontractor that is hired to perform any portion of the real property contract.  Such forms must also be issued to persons with whom a contractor is performing work, with certain exceptions.  For more information regarding the use of Form E-589CI see “Important Notice:  Form E-589CI, Affidavit of Capital Improvement” at http://www.dor.state.nc.us/taxes/sales/impnotice120816_e589ci.pdf.  Note that the use of these forms is a new requirement.  Failure of a contractor to issue a completed form when required will result in the transaction becoming a repair, maintenance or installation service subject to the tax.

Repairs, Installation, Maintenance Services

A contractor is responsible for collecting the sales tax from its customers on contracts when the project is not a capital improvement, remodeling or real property contract.  Similarly a person who only provides repair, installation, and maintenance services, as well as retailer-contractors must collect the tax on certain repair, installation, and maintenance services.  Specifically, the tax should be collected from customers on the entire invoice (both parts and services) for:

• The replacement of a fixture in or on a building or structure unless the replacement is part of a remodeling.
• A single repair, maintenance, or installation service.

The following are examples of services generally considered repair, maintenance, and installation services for taxable transactions.

• Repair for an air conditioning or heating unit that is not working properly.
• Rekey locks for real property by a locksmith.
• Plumbing services to unclog a drain or to identify and repair a leak in a pipe.
• Services by a roofing company to identify and repair a roof leak.
• Replace damaged exterior bricks.
• Replace or repair of a storm door or garage door.
• Repair or replace countertops.
• Replace or reface kitchen cabinet doors
• Repair or replace a water heater.
• Repair or replace a single light fixture, single plumbing fixture (e.g., toilet or sink).
• Carpet or linoleum installation for a single room.
• Replacement of plate glass window.

Sales of or the gross receipts derived from the following repair, maintenance, and installation services are not taxable:

• A fee or charge for an inspection required by law provided the charge is separately stated on the invoice at the time of the sale. The exemption applies to any inspection required by a governmental entity. Examples of items where an inspection may be required by law include (list not all-inclusive): motor vehicles; fire extinguishers; alarm/sprinkler systems; certain slicers, grinders, and balers; backflow valves.
• Services performed for a person by a related member.
• Services performed to resolve an issue that was part of a real property contract if the services are performed within six months of completion of the real property contract or, for new construction, within 12 months of the new structure being occupied for the first time.
• Cleaning of real property, except where the service constitutes a part of the gross receipts derived from the taxable rental of an accommodation or for a pool, fish tank, or other similar aquatic feature.
• Services on roads, driveways, parking lots, and sidewalks.
• Removal of waste, trash, debris, grease, snow, and other similar items from tangible personal property and real property, but does not include removal of waste from portable toilets.
• Home inspections related to the preparation for or the sale of real property.
• Landscaping service.
• Pest control service.
• Services purchased for resale under an exemption certificate or a direct pay permit.
• Repair, maintenance, and installation services purchased by a qualifying farmer or conditional farmer.

Installation charges may be purchased exempt of the tax by real property contractors where the installation charges are part of the sales price of tangible personal property purchased for use in real property contracts or when part of the sales invoice for repair, maintenance, or installation service includes separately stated installation charges.

Any tangible personal property that becomes a part of real property in connection with taxable repair, maintenance, and installation services may be purchased exempt of the tax by the service provider.  However, such property used in connection with nontaxable service transactions is taxable to the service provider.

Mixed Transaction Contracts

A contract that includes both a capital improvement to real property and a repair, maintenance and installation service is a mixed transaction contract and taxable as follows:

• If the price of the taxable repair, maintenance, and installation services included in the contract does not exceed 10 percent of the contract price, then the repair, maintenance, and installation service portion of the contract, and the tangible personal property, digital property, or service used to perform that service, are taxable as a real property contract. As such, no sales tax is required to be collected.

• If the price of the taxable repair, maintenance, and installation service included in the contract is equal to or greater than 10 percent of the contract price, then sales/use tax applies to the taxable repair, maintenance, and installation service portion of the contract. The person must determine an allocated price for each taxable repair, maintenance, and installation service in the contract based on a reasonable allocation of revenue that is supported by the person’s business records kept in the ordinary course of business.

Service Contracts

Service contracts where the contract provider agrees to maintain, monitor, inspect, or repair digital property or tangible personal property for a period of time regardless of whether the property becomes a part of or is applied to real property are generally taxable.  The exemptions from the tax on repair, maintenance, and installation services generally are applicable to service contracts relating thereto.

This article focused primarily on contracts relating to real property and did not cover all the provisions of the law relating to repair, installation and maintenance services.  For additional information relating to such services generally see the following publications on the North Carolina Department of Revenue’s web site, www.dornc.com or contact your Keiter advisor or 804.747.0000 | Email.

Sources:

• Repair, Maintenance, and Installation Services – Directive SD-16-4 (11-15-16) http://www.dor.state.nc.us/practitioner/sales/directives/SD-16-4.pdf
• Real Property Contracts – Directive SD-16-3 (11-15-16) http://www.dor.state.nc.us/practitioner/sales/directives/SD-16-3.pdf
• Important Notice:  Service Contracts (11-15-16) http://www.dor.state.nc.us/taxes/sales/impnotice111516_servicecontracts.pdf