North Carolina Sales Tax Law Changes for Contractors and Installation and Repair Services

New North Carolina legislation expanding sales and use tax to certain services goes into effect on March 1, 2016.

By Jeff Weinkle, SALT manager

In a shuffling of tax burdens, North Carolina passed legislation last year that lowers business and personal income tax rates but expands sales and use tax to certain services that were not previously subject to tax. Beginning March 1, 2016, these changes will impact businesses that perform installation and repair services on tangible property and contractors who may also sell tangible property. In anticipation of these changes, the North Carolina Department of Revenue issued two Directives on Feb. 5, 2016, SD-16-1 and SD-16-2, to explain the new rules.

Prior to March 1, charges for installation and repair services performed on tangible personal property were exempt from North Carolina sales and use tax when these charges were stated separately from taxable property on invoice. For example, if a customer purchased a taxable product and also paid the vendor to install that property, charges for the installation were not subject to tax when itemized separately from the charges for the property. As of March 1, there is no longer a specific exemption for installation and repair services so they will be subject to tax regardless of how they are shown on the invoice when billed by a retailer.

These changes are simple when dealing with typical retailing businesses that sell tangible property, software, or similar products and that may offer to install or repair such property, but further explanation is needed for businesses that perform services on real property.

Under the new law, installation, maintenance and repair services are taxable when sold by anyone engaged in “retail trade.” Retail trade is defined as a trade in which the majority of North Carolina revenue comes from retailing tangible personal property, digital property or services to consumers. This includes buying goods for resale and rendering services incidental to those sales, as well as making sales of repair, maintenance and installation services related to tangible property not sold by that business. [1] A business that meets the definition of retail trade cannot operate as a real property contractor. [2]

This means businesses that engage in real property contracts but also sell and perform services on tangible property, known as retailer-contractors, must begin to assess sales tax on their real property contracts if a majority of their North Carolina revenues are derived from retail trade. [3] For example, if a flooring contractor derives $70,000 in annual revenue from the retail sale of carpeting that it does not install and also $30,000 in annual revenue from real property contracts under which it provides and installs carpeting for customers, this contractor is primarily engaged in retail trade and must collect sales tax on both its retailing and contracting sales.

In other words, if a contractor derives most of its North Carolina revenues from retail trade activities, then it may not operate as a real property contractor for sales and use tax purposes. Retailer-contractors that primarily derive their income from real property contracts and thus are not considered to be engaged in retail trade must still collect tax on their retail sales that are not real property contracts.

The SALT group at Aprio is experienced with these issues and is available to assist you in reviewing your transactions to identify the proper sales tax treatment. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant SALT developments and include them in future issues of the Aprio SALT Newsletter.

Contact Jeff Weinkle, SALT manager, at jeff.weinkle@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the February 2016 SALT Newsletter. To view the newsletter, click here.

[1] Refer to NC Gen. Stat. §105-164.3(35b). Businesses that only provide repair, maintenance and installation services and never make sales of tangible property are excluded from the definition of retail trade, meaning they likely do not need to begin assessing sales tax.

[2] Real property contractors furnish tangible property to be incorporated into real property and the associated labor to install or apply that tangible property into real property. These businesses normally pay sales or use tax on any taxable property they purchase for use in their contracts and do not assess sales tax on their invoices to customers for such contracts. See NC Gen. Stat. §105-164.4H.

[3] Businesses only use their North Carolina revenues to determine whether or not they are engaged in retail trade. Revenue from other states is not included when making a determination of whether a majority of revenue comes from retailing tangible property, digital property or services.

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 this matter.

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