North Carolina expands sales tax on services, January 2017

North Carolina expanded sales tax to numerous repair, maintenance, and installation services on March 1, 2016. Beginning January 1, 2017, taxable repair, maintenance, and installation services are further expanded to include real property and digital property in addition to tangible personal property, and a person whose only business activity is providing repair, maintenance, and installation services (RMI) is considered a retailer and required to register, collect and remit tax on the retail sale of those services. For the period March 1, 2016 through December 31, 2016, RMI provided by a person whose only business activity is providing these services are exempt.

Taxable RMI

As of January 1, 2017, the following repair, maintenance, and service charges are taxable when applied to tangible personal property, motor vehicles, digital property, and real property (except tangible personal property or digital property installed or applied by a real property contractor pursuant to a real property contract):

• To keep or attempt to keep property or a motor vehicle in working order to avoid breakdown and prevent deterioration or repairs
  • For example, to clean, wash, or polish property
• To calibrate, refinish, restore, or attempt to calibrate, refinish, or restore property or a motor vehicle to proper working order or good condition
  • For example, to replace or put 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 property or a motor vehicle to proper working order or good condition
• To install, apply, connect, adjust, or set into position tangible personal property, digital property, or a motor vehicle
• To inspect or monitor property or a motor vehicle
  • Does not include security or similar monitoring services for real property

Taxable repair, maintenance, and installation services for a motor vehicle include, but are not limited to, the following:

• Computer diagnostics repairs, updates, and maintenance
• Electrical: e.g., battery test, charge or jump service; test fuse, visually inspect wiring or wiring components
• Fluid exchanges: e.g., oil, engine coolant/antifreeze, brake, power steering, windshield washer, etc.
• Fuel system: e.g., fuel lines, fuel treatment; adjust throttle
• Suspension: e.g., align, inspect steering and suspension; grease joints or bearings

The North Carolina Department of Revenue provides the following examples of taxable transactions:

• A property owner purchases tangible personal property (TPP) and performs its own repair services. The property owner pays tax on the TPP.
• A property owner purchases TPP from a retailer and hires a handyman to install it. The retailer collects tax on the TPP, and the handyman collects tax on the installation service charges.
• A property owner hires a retailer to perform repair, maintenance or service charges, and the retailer purchases TPP for the job. The retailer collects tax on the TPP and the service charges.

Exemptions

There are also a number of specific exemptions related to repair, maintenance, and installation services on real property. Exempt RMI charges include, but are not limited to, the following:

• Alteration and repair of clothing (except where the service constitutes a part of the gross receipts derived from the taxable rental of clothing or for alteration and repair of belts and shoes)
• Cleaning of real property (except where the service constitutes a part of the gross receipts derived from the taxable rental of an accommodation or for a pool, fish tank, or other similar aquatic feature)
• Home inspections related to the preparation for or the sale of real property
• Landscaping services
• Self-service car washes
• Services performed for a person by a related member
• Services performed on a qualified aircraft or jet engine
• Storing a vehicle, provided the storage charge is separately stated
• Towing services, provided the charges are separately stated

Although the North Carolina Department of Revenue strives to educate taxpayers about sales tax changes, the new policies will undoubtedly cause confusion. Recognizing this, the legislature has determined that retailers who have made a good-faith effort to comply with the law and collect the proper amount of tax are not liable for the under-collection of sales or use tax as a result of the changes in law. This applies to assessments for any reporting period from March 1, 2016 through December 31, 2022.

See the North Carolina Department of Revenue for additional information:

• SD-16-4
• SD-16-3 (on sales tax and real property contracts)
• Importance notice: motor vehicle repair, maintenance, and installation services; storage; and towing services
• Important notice: service contracts

Tax automation software helps businesses with sales and use tax compliance in all states. Learn more.