NC Sales Tax: Not Just Goods, But Now Services

Co-authored by Chris Foster, estate planning attorney

While  most  of  us  are  accustomed  to  paying  sales  tax  at  the  grocery  store  and  department  store, individuals  are  not  used  to  paying  taxes  on  services  provided  to  the  consumer.    However,  recent changes  to  North  Carolina  tax  laws  make  it  mandatory  for  service  providers  to tax  those  that  benefit from some services.  One particular area in which these new service contract sales tax laws may affect you concerns your home.

What is a sales tax?

Believe  it  or  not,  sales  tax  is  defined  as  a  tax  imposed  on  the  sale  of  goods AND  services.    In  North Carolina,  a  percentage  of  the  good  or  service  is  taxed.    The  amount  collected  is  then  allocated  among State  and  local  municipalities.    For  example,  in  Cumberland  County,  sales  tax  is  7.00%  of  the  price charged, which includes the 4.75% for the State and 2.25% for county taxes.  

Previously, the North Carolina General Statutes provided that sales taxes did not apply to the  purchase amount of  a  service  contract  for  tangible  personal  property  that  will  or  may  become  part  of  real property.    Under  the  new  laws,  the  cost  a  consumer  pays  for  a  service  contract is  subject  to  sales  tax regardless of whether the property covered in the service contract becomes a fixture to real property.

A  service  contract  is  defined  under  the  Statutes  as  an  agreement  where  the  person  responsible  for providing the service agrees to maintain, monitor, inspect, or repair digital property or tangible personal property  for  a  period  of  time  whether  the  property becomes  a  permanent  part  of  the real  estate.  Examples  of  service  contracts  include  warranty  agreements  other  than  a  manufacturer’s  warranty provided  at  no  charge  to  a  purchaser,  an  extended  warranty,  a  maintenance  agreement,  or a  repair contract. Thus,  under  the  current  laws,  if  a  person  purchases  a  new  refrigerator  and  elects  to  purchase  the extended  warranty,  they  will  be  charged  sales  tax  on  both  the  purchase  of  the refrigerator AND  the purchase  of  the  warranty.    Similarly,  if  you  hire  a  plumber  to  repair  a  sink  in  your  house,  the maintenance  provided  by  the  plumber will yield  a  sales  tax  to  the  homeowner.    Repairs  to  heating,  air conditioning,  and  electrical  contractors  are  also  subject  to  sales  tax.    Even  the  contractor  who  installs new carpet in your home will charge you sales tax.

So, am I being taxed on everything now?

After  reading  this, you  may  think  that  you  will  pay  sales  taxes  every  time  you  spend  money  on your home, but  there are several exceptions to these new laws.  Some of the exemptions for sales tax include the following: 

  • Repairs  or  maintenance  to  resolve  an  issue  that  was  part  of  a  real  property  contract  if  the services were performed within 6 months of the real property contract;
  • Repairs  or  maintenance  to  resolve  an issue  related  to  a  new  construction  home  if  the  services were provided within 12 month of the occupancy of the home;
  • Cleaning of real property;
  • Repairs to driveways and sidewalks;
  • Trash and waste removal;
  • Home inspections related to the preparation for or sale of real property; and
  • Landscaping services. 

 

What these laws mean to you?

For  most  of  you,  the  laws  related  to  sales  tax  on  services  will likely  only  lighten your wallet more than you are accustomed.  Receipts for some of the services provided to real property will exhibit a new line item that says sales tax at a percentage based on the county.  It is important to note that these increases are not due to the service provider raising its prices.  Instead, the amounts are being  collected  by  the  service  provider  for  the  North  Carolina  Department  of  Revenue  and  local government agencies.    

In addition, the impact of  the changes  in the law is much more complex for the business owner rather than  the  consumer.  By  default,  the  service  provider  is  responsible  for  charging  the  sales  tax  and remitting it to the proper agency.  These new laws require business owners to implement new processes and procedures, which, in turn, increase the internal costs of the business.

As  the  consumer,  you  will  not  have  to  keep  a  record  of  all  of  the  sales  taxes  you  paid  throughout  the year nor make sure that the service providers are in compliance and charging sales tax (at least not yet).

These are just  some  of  the  new  laws  related  to  sales  and  use taxes,  but  it  is  not  an  all-encompassing list.  If you are a business owner that believes these new laws may impact your business, we suggest you contact a CPA or tax attorney to provide guidance on these issues.