North Carolina Property Contractors: Do you know your Sales Tax Obligations?

Home Appraiser or Home Inspector surveying roof of property

By Jess Johannesen, SALT Senior Manager at Aprio

At a glance:

  • The Main Takeaway: Two private letter rulings out of North Carolina help shed light on which activities performed under a real property contract result in different sales tax treatment.
  • Impact on Your Business: Knowing your sales tax obligations will help your business avoid unnecessary tax liabilities and penalties that would negatively impact your tax bill and bottom line.
  • Next Steps: Review the two RMI private letter ruling and establish which applies to your real property contractor business.

Need help navigating these unique sales tax requirements? Aprio’s State and Local Tax (SALT) team is experienced in sales tax issues facing contractors, in North Carolina and other states. Contact us today.

The full story:

Beginning January 1, 2017, North Carolina expanded its sales tax base to impose tax on certain repair, maintenance and installation (RMI) services related to real property. Specifically, RMI services related to real property became taxable unless the services were performed by a “real property contractor” pursuant to a “real property contract.”

However, the process of identifying whether certain activities are performed under a real property contract is not always clear. In February 2021, North Carolina issued two private letter rulings that demonstrate how RMI services related to real property may result in different sales tax treatment.[1] We break down these letter rulings, and what they mean for real property contractors, below.

Unpacking the first letter ruling

In the first letter ruling, the taxpayer was engaged in the retail sale and leasing of commercial modular buildings. The taxpayer purchased the buildings from a manufacturer which were delivered to the customer’s site. The taxpayer would then construct the foundation, sidewalks, decks and porches. The taxpayer also installed the plumbing and electrical work. In the example of the sale presented by the taxpayer, all these activities would be under a single contract.

RMI services related to real property (such as the commercial modular building once it is attached and affixed to the land) are taxable unless the service performed by the real property contractor is a “capital improvement” to real property. Eleven specified activities are included in the definition of a “capital improvement,” such as landscaping and certain types of painting or wallpapering of real property.[2]  Notably, a capital improvement includes “new construction, reconstruction or remodeling,” which are all separately defined terms as well.

Based on these rules, the ruling concluded that the taxpayer was performing a capital improvement to real property under a real property contract (likely as a new construction, although this is not specifically stated in the ruling). As a result, the taxpayer should not charge sales tax to its customer for the real property contract; instead, the taxpayer is considered the consumer of the products that it purchases and installs, which become part of the real property or are used to fulfill the real property contract.  Most notably, this means that the taxpayer should pay sales tax when it purchases the commercial modular building from the manufacturer.

Unpacking the second letter ruling

In the second letter ruling, the taxpayer was a contractor that replaced and repaired roofs. For the project at issue, the entire roof was not replaced — instead, the existing roof was “substantially repaired at great expense.” The taxpayer also noted that the work performed on the roof was not part of a larger project and that the only other work it performed was cleanup. When analyzing the project, the state noted that the project was not an installation of a new roof and was not a complete roof replacement either. Therefore, this single project to repair the existing roof did not meet the definition of “remodeling” or any other type of capital improvement.

The taxpayer added that the customer capitalized and depreciated the charge for the roof repair under the requirements of the Internal Revenue Code. This is notable, since the definition of a “capital improvement” includes, in part, the installation of equipment or a fixture that is attached to real property and that is depreciated under the Internal Revenue Code.[3] However, the ruling noted that since the project did not include the installation of equipment or a fixture that was attached to real property (i.e., the roof was not entirely replaced with the installation of a new roof), it did not qualify as a capital improvement, despite the fact that the cost was depreciated.

As such, the taxpayer’s project in the second letter ruling meets the definition of a taxable RMI service.[4]  The taxpayer was required to collect and remit sales tax on the entire charge of the service, and any tangible personal property that became part of the roof should have been purchased by the taxpayer without payment of sales tax.

The bottom line

These two letter rulings illustrate the different sales tax obligations that real property contractors in North Carolina face with respect to certain services related to real property. In some instances, the contractors should not charge sales tax to their customers and instead should pay sales tax on the tangible personal property it buys. In other instances, the contractors should purchase tangible personal property exempt from sales tax and instead charge sales tax to their customers on the full price of the project. Additionally, there are various types of certificates and forms that contractors should utilize to document these transactions.

Aprio’s SALT team is experienced in navigating the unique sales tax issues facing contractors, whether they are located in North Carolina or in another state. We can help you review your transactions to identify the proper sales tax treatment and the proper documentation for recordkeeping so that you comply with your sales tax obligations and do not incur unexpected liabilities or penalties.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Senior Manager at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the April 2021 SALT Newsletter.

[1] North Carolina SUPLR 2021-0009, 02/15/2021; North Carolina SUPLR 2021-0011, 02/25/2021.

[2] NC Gen. Stat. §105-164.3(31).

[3] NC Gen. Stat. §105-164.3(31)(d)

[4] NC Gen. Stat. §105-164.3(225)


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.