Tax Alert: North Carolina Sales and Use Tax Changes for Real Property and Retailer Contractors and Retailers

February 24, 2016

Important Updates for Real Estate and Construction Companies Operating in North Carolina

What’s New?

Beginning March 1, 2016, the following are subject to North Carolina sales and use tax:

  • Repairs, maintenance and installation services[1] (RMI);
  • Service Contracts[2];
  • Receipts derived by those engaged in a retail trade.[3]

These changes could impact those operating as real property contractors or retailer-contractors in North Carolina, among many others. Below we summarize the guidance provided to date from the North Carolina Department of Revenue regarding these changes.

What Defines RMI Services?

“Repair, maintenance, and installation services[4]” include the following activities:

  1. To keep or attempt to keep tangible personal property or a motor vehicle in working order to avoid breakdown and prevent repairs.
  2. To calibrate, restore, or attempt 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.
  3. To troubleshoot, identify, or attempt 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.
  4. To install or apply tangible personal property except tangible personal property installed or applied by a real property contractor pursuant to a real property contract.

Only “retailers” engaged in business in North Carolina are liable for the sales or use tax on the sales price of or the gross receipts derived from repair, maintenance and installation services sold at retail in North Carolina.[5] Those who operate solely as real property contractors are not included in the definition of retailers; nor are those whose only business activity is providing repair, maintenance, and installation services as long as they do not otherwise meet the definition of a retail trade.[6]  Retailer-contractors, persons who act as retailers when selling tangible personal property at retail and as real property contractors when performing real property contracts, could be considered “retailers” if they meet the definition of a retail trade because the majority of their revenue is from retailing tangible personal property, digital property, or services to consumers.

“Retail trade” is defined, in part, as “[a] trade in which the majority of revenue is from retailing tangible personal property, digital property, or services to consumers.”[7]  The term includes activities of a person properly classified in NAICS sector 44-45, buying goods for resale, and rendering services incidental to the sale of merchandise. The term typically includes maintaining an inventory and may include the provision of repair, maintenance, and installation services even if the tangible personal property becomes part of or affixed to real property.[8]

The following is a non-exhaustive list of businesses that could be considered engaged in a retail trade[9]:

  • Building Material and Supplies Dealers
  • Electronic and Appliance Stores
  • Floor Covering Stores
  • Hardware Stores
  • Home Centers
  • Household Appliance Stores
  • Lawn and Garden Equipment and Supplies Stores
  • Nursery, Garden Center, and Farm Supply Stores
  • Other Building Material Dealers
  • Paint and Wallpaper Stores
  • Window Treatment Stores

Persons engaged in a “retail trade” must treat all sales transactions as retail sales subject to sales and use tax, unless the retailer maintains proper documentation substantiating that a sale is exempt from sales and use tax.

Do These New Rules Apply to Me?

Whether your activities in North Carolina are subject to sales and use tax will depend on which of the definitions outlined above apply to you.

If your only activity in North Carolina is providing repair, maintenance and installation services, where your activities do not otherwise meet the definition of “retail trade,” you are not a retailer and are not liable for sales or use tax on the sales price of or gross receipts derived from repair, maintenance and installations services regardless of whether your activities meet the definition of “repair, maintenance, and installation services” outlined above.[10]

If you only operate as a real property contractor, you are not a retailer of repair, maintenance and installation services and are not liable for sales or use tax on the sales price of or gross receipts derived from repair, maintenance and installation services.[11]

Example: A person engaged solely in the business of installing and repairing in-ground septic tank systems is a real property contractor. The person is not a retailer of repair, maintenance and installation services, no matter that the person may charge a fee for troubleshooting a problem with the septic tank system.[12]

A person who is classified as a retailer-contractor[13] may be liable for sales or use tax on the sales price of or gross receipts derived from repair, maintenance and installation services on or after March 1, 2016 if the revenue from retail sales is the majority of the person’s revenue.[14]

What About Service Contracts?

Effective March 1, 2016, the sales price of or the gross receipts derived from the sale or the renewal of a service contract sold at retail on or after March 1, 2016, is subject to the general 4.75% State, applicable local, and applicable transit rates of sales and use tax, regardless of whether the tangible personal property covered in the service contract becomes a part of or is affixed to real property.[15]

A contract where the obligor under the contract agrees to maintain or repair tangible personal property is a service contract. Examples of a service contract include a warranty agreement, an extended warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract. A service contract does not include a manufacturer’s warranty or dealer’s warranty provided at no charge to the purchaser.[16]

Examples of Taxable Service Contracts on or after March 1, 2016:

Tangible Personal Property Attached to Real Property[17]

HVAC Company engaged in business in North Carolina sells a service contract with a sales price of $500.00 for an air compressor to a homeowner for a home in North Carolina. The company should collect and remit the state and applicable local taxes on the sales price of $500.00. Although the company performs services as part of a real property contract for the installation of the HVAC system, the company is a retailer of service contracts on March 1, 2016 due to the change in the sales and use tax laws.

Tangible Personal Property That Becomes Part of Real Property[18]

A retailer engaged in business in North Carolina sells and installs a subzero refrigerator in a customer’s North Carolina home. At the time of the sales transaction, the customer elects to purchase a two year extended warranty. The sale of the extended warranty by the retailer to the customer is a taxable service contract. The retailer should collect the state and applicable local taxes on the sales price of the extended warranty.

Renewal of Service Contract[19]

Tangible Personal Property Attached to Real Property

A North Carolina retailer sold and installed a generator for a homeowner at his North Carolina home. In addition, on March 3, 2015, the homeowner purchased a service contract with an annual renewal option. The retailer did not collect sales tax on the sales price of the service contract sold on March 3, 2015, because the sale of the service contract was not subject to sales or use tax at such time. The homeowner elects to renew the service contract on March 3, 2016. The retailer should collect and remit the state and applicable local sales tax on the March 3, 2016 billing for the service contract renewal.

Purchases by the service provider under a service contract[20]:

Purchases for parts and services to complete a Service Contract for Tangible Personal Property

If the purchaser of the taxable service contract is not charged for the item or service, the obligor, retailer or wholesale merchant should purchase the item or service used to maintain or repair the tangible personal property exempt from sales and use tax. For purposes of this exemption, the term “item” does not include a tool, equipment, supply or similar tangible personal property used to complete the maintenance or repair and that is not deemed to be a component or repair part of the tangible personal property for which a service contract is sold to a purchaser. The exempt purchase from sales and use tax is accomplished by issuing a properly completed Form E-595E, Streamlined Sales and Use Tax Agreement Certificate of Exemption, to the seller.[21]

Example:

On March 1, 2016, a retailer engaged in business in North Carolina makes a retail sale of a service contract on a garage door installed in a customer’s home in North Carolina. The retailer collects sales tax on the sales price of the service contract. On March 31, 2016, the customer’s garage door requires service covered by the service contract. The obligor arranges for repair services and is charged $250.00 for parts and installation by a garage door retailer. The obligor provides Form E-595E to the garage door retailer to purchase the parts and installation exempt from sales and use tax and does not charge the purchaser of the service contract for the parts and installation.

Other Service Contract Exemptions[22]:

The following examples of items are exempt from the tax imposed from a service contract:

  • A service contract on qualifying equipment which is exempted from sales tax and use tax when purchased by a manufacturer
  • A service contract on qualifying equipment which is exempted from sales tax and use tax when purchased by a qualifying farmer
  • Security or similar monitoring contract for real property
  • A service contract on a transmission, distribution, or other network asset contained on utility-owned land, right-of-way, or easement
  • Service contracts on a transmission, an engine, rear-end gears, and any other item purchased by a professional motorsports racing team or a related member of a team for which the team may receive a sales tax refund under N.C. Gen. Stat. §105-164.14A(a)(5)[23]

Example:

On April 14, 2016, a manufacturer purchases a service contract for a conveyor or motor for a conveyor or system used in the production process and the system is attached to real property. The purchase of the service contract for the conveyor motor covered in the contract is exempt from sales or use tax and is not subject to the certain machinery and equipment tax. The manufacturer should issue a properly completed Form E-595E or provide the required data elements to the seller as the seller’s authority to exempt the sale of the service contract from sales or use tax.

Relief Provisions

In anticipation of difficulty with complying with the new sales tax provisions, the Department of Revenue is authorized to compromise a taxpayer’s liability for taxable repair, maintenance and installation services if the taxpayer made a good-faith effort to comply with new provisions for assessments issued before July 1, 2020.

If you have questions about how these new provisions may affect you, contact your Elliott Davis Decosimo advisor for assistance or State and Local Tax Practice leader Larry Hyatt at 615.651.7035 or Christanna Taylor at 803.399.9834.

Printable Version

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[1] N.C. Gen. Stat. § 105-164.4(a)(16)

[2] N.C. Gen. Stat. § 105-164.3(38b)

[3] N.C. Gen. Stat. § 105-164.3(34a)

[4] N.C. Gen. Stat. § 105-164.3(33g)

[5]See  North Carolina Department of Revenue Directive,  SD-16-2

[6] N.C. Gen. Stat. § 105-164.3(35)

[7] N.C. Gen. Stat. § 105-164.3(34a)

[8]See North Carolina Department of Revenue Directive,  SD-16-1

[9] Id.

[10] See NC DOR Directive, SD-16-2,  Repair, Maintenance, and Installation Services

[11] Id.

[12] Id.

[13] N.C. Gen. Stat. § 105-164.3(35a) defines “retailer-contractor” “[a] person that acts as a retailer when it sells tangible personal property at retail and as a real property contractor when it performs real property contracts.”

[14] See North Carolina Department of Revenue Directive,  SD-16-2

[15] See North Carolina Department of Revenue  Important Notice: Sale or Renewal of a Service Contract for Tangible Personal Property Changes

[16] N.C. Gen. Stat. §105-164.3(38b)

[17] NC DOR, Important Notice: Sale or Renewal of a Service Contract for Tangible Personal Property Changes (Feb. 2, 2016)

[18] Id.

[19] Id.

[20] Id.

[21] N.C. Gen. Stat. §105-164.13(62)

[22] NC DOR, Important Notice: Sale or Renewal of a Service Contract for Tangible Personal Property Changes (Feb. 2, 2016)

[23] N.C. Gen. Stat. § 105-164.4I