Changes on Sales Tax Imposed on Repair, Maintenance and Installation
On January 11, 2016, North Carolina Department of Revenue (NCDOR) issued an important notice regarding the repeal of installation charges exemption from sales tax.
Subsequent to that notice on February 5, 2016, the NCDOR issued Directive SD-16-1 and Directive SD-16-2 to direct taxpayers on how to comply with these new regulations.
As of March 1, 2016, businesses may be required to collect sales tax on repair, maintenance, and installation services depending on the taxpayer type (i.e. retailer, retailer-contractor or real property contractor).
Prior to March 1, 2016, the NCDOR has allowed an exemption of sales tax for the portion of the sales price or purchase price for installation charges that were separately stated on an invoice. If more than 50% of your revenue is comprised of retail sales within the State, more than likely, you are considered a retailer and should collect and remit sales tax on all sales within the State, including repair, maintenance, and installation services. If your business meets this criteria, you cannot operate as a retailer-contractor nor a real property contractor. If your business does not meet this criteria, you are probably considered a retailer-contractor or a real property contractor.
As of March 1, 2016, businesses must evaluate what type of taxpayer they are. If your business meets this criteria, you cannot operate as a retailer-contractor nor a real property contractor. If your business does not meet this criteria, more than likely, you are considered a retailer-contractor or a real property contractor.
If less than 50% of your revenue is comprised of retail sales (i.e. 30% retail sales and 70% sales from real property contracts with customers where tangible personal property is installed to or becomes a part of real property) within the State, in all likelihood, you are a retailer-contractor and would only need to collect and remit sales tax on your retail sales within the State.
In the case that you are a contractor that only purchases material for installation and then provides the installation to your customer, more than likely, you are considered a real property contractor and would pay the sales tax at the time you purchase the materials and do not meet the definition of a retailer and therefore would not need to collect and remit sales tax for installation services provided.
Additionally, effective March 1, 2016, income derived within the State from the sale of or renewal of service contracts may be subject to sales tax. Contracts can include but are not limited to warranty agreements, extended warranty agreements, maintenance agreements, and repair contracts.
As always, there are exceptions to the rules. If you think your business may be subject to these new regulations, it may be beneficial for you to consult with your tax advisor. Below are links to NC Directive SD-16-1 and NC Directive NC SD-16-2 for a more in depth reading of issues that may arise.
NC Directive SD-16-1 http://www.dornc.com/practitioner/sales/directives/SD-16-1.pdf
NC Directive SD-16-2 http://www.dor.state.nc.us/practitioner/sales/directives/SD-16-2.pdf
Article by: Justin Deal, Tax Senior Accountant