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Individual tax strategies
Repair, Maintenance, and Installation Services Subject to NC Sales Tax
Beginning March 1, 2016, North Carolina sales and use tax will apply to the sale price or gross receipts derived from, repair, maintenance, and installation services. This will include services performed to determine what needs to be done to keep tangible personal property in working order, to actually keep such property in working order, and to restore such property to working order.
“Motor vehicles are specifically included as tangible personal property in this legislative change, along with services to install or apply tangible personal property,” says Tom Hogan, a tax principal with CliftonLarsonAllen.
Department of revenue guidance
According to the North Carolina Department of Revenue, the 4.75 percent sales tax applies to sales occurring on or after March 1, 2016, and to gross receipts derived from such services provided on or after that date.
The phrase “repair, maintenance, and installation services” includes the following activities:
- To keep or attempt to keep tangible personal property or a motor vehicle in working order to avoid breakdown and prevent repairs.
- 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.
- 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.
- To install or apply tangible personal property (except for tangible personal property installed or applied by a real property contractor) pursuant to a real property contract.
Some taxpayers are not subject to the change
A taxpayer whose only business activity is performing these repair, maintenance, or installation services, and who otherwise derives less than half of its revenue from retail sales, will not be considered a “retailer” and will not be subject to sales tax on these repair, maintenance, and installation services. For instance, it would not apply to most auto repair garages.
A taxpayer who operates solely as a real property contractor will also not be subject to sales tax on its repair, maintenance, or installation services. A real property contractor that installs tangible personal property onto real property, but does not also sell tangible personal property at retail, will not become a “retailer,” and therefore will not be subject to the change in sales tax.
In addition, repair, maintenance, and installation services specifically exclude installation services performed by a real property contractor pursuant to a real property contract. Thus, even a real property contractor who also makes retail sales of tangible personal property will not be required to pay tax on receipts from installation services performed as part of a real property contract.
The following repair, maintenance, and installation services will be exempt from sales tax:
- Services performed with respect to property (other than a motor vehicle) that is exempt from sales tax
- Services purchased for resale
- Services used to maintain or repair tangible personal property or a motor vehicle pursuant to a taxable service contract if the purchaser of the contract is not charged for the item
- Services and parts provided under dealer or manufacturer warranties (including motor vehicle warranties)
- Services performed on certain jet aircraft and jet engines
Guidance for real property contractor and retailer-contractor
The definition of “real property contractor,” according to the law, “does not include a person engaged in retail trade.” If a person meets the definition of retail trade, that person cannot act as a real property contractor or a “retailer-contractor.” A person who meets the amended definition of a real property contractor is liable for payment of sales and use tax on taxable repair, maintenance, and installation services purchased to fulfill a real property contract. A person who does not meet the definition of retail trade may operate as a retailer-contractor.
How we can help
Determining whether this law applies to you and your business can be tricky. Our experienced tax professionals can help you understand your sales tax liability for repair, maintenance, and installation services in North Carolina and answer any of your questions about this change in law.