March 3, 2016
Following significant discussion during last year’s session, legislators presented numerous areas where they desired to have sales and use tax applied to both goods and services in certain transactions. As of March 1, 2016, these changes have taken effect and impact multiple areas where REALTORS® and their clients may be directly affected.
Below you will find an analysis of some of the most relevant changes impacting the real estate industry.
In general, many of these changes seek to tax the labor provided in the installation of already taxed products. Based on a review of the changes, most of them fall into area such as home and automobile modification or update. Services ranging from carpet installation to clothing repair and watch repair are included in the list of new taxable services. A full listing of the March 1 tax changes can be found here.
These changes fall into two categories: Retail Sale and Installation and Repair, Service and Installation Services. Many areas fall into both categories so it is important to examine your service agreements carefully.
While most of these taxes are clear-cut, others have multiple layers of contingencies which apply to them. A few such examples are discussed in the section below focusing on New Home Construction and Real Property Renovation. Other examples are found in circumstances where the individual completing the service is not engaged in the retail activity related to the service. Additionally, there a multiple instances in the new changes where there is no tangible item provided but the service fees are taxable, such as in the case of tire repair.
New Home Construction and Real Property Renovation
Of all of the changes, the potential impact on these two circumstances has caused the most significant amount of questions.
To begin with, the March 1 changes do not alter existing law allowing for no sales tax to be applied to installation services in new home construction or in renovation to real property. As it has been previously, sales tax will continue to be applied to the materials used in the project. Existing law allows for an exemption for those classified as a “real property contractor” (as defined by GS 105-164.3(33a) and these changes do not impact that exemption.
Where there may be some confusion is related to subcontractors, especially when it may be unclear as to their specific business. In circumstances where a subcontractor are themselves classifies as a “real property contractor”, their labor will remain exempt. The example provided in the Department of Revenue’s explanation of this circumstance is a carpet installer who provides the materials for the project (carpet, padding, etc.) as a component of their contract but that installer is not themselves classified as a retailer. Additionally in circumstances where a person’s sole business activity is providing repair, maintenance, and installation services, that person is also exempt from the sales tax on labor as that person is not classified as a retailer. Finally, in circumstances where the subcontractor is performing services such as framing where they have no retail component, they are also exempt from this sales tax.
The opinions and analysis provided herein are those of NC REALTORS® Government Affairs Department staff. They are intended solely for educational purposes and should not be a substitute for consultation with your attorney, Certified Public Accountant (CPA), or the North Carolina Department of Revenue.