NC Sales Tax on Labor - Will you need to collect sales tax?
Contractor, electrical, plumbing, landscape, cabinet makers and other subcontractors should see updates here.
1/1/2017 UPDATE and CAUTION: The blog following was posted before NC adopted new laws effective January 1, 2017 extending sales tax to building, electrical, plumbing and other contractors on smaller repair, maintenance and installation (RMI) services related to buildings. Contractors performing smaller jobs, generally $10,000 or less and/or not requiring a permit, that do not rise the to level of a "capital improvement", will be required to register with the Department of Revenue and collect sales tax on both materials and labor on those jobs that are not "capital improvements". Accordingly, such contractors may wish to purchase their materials on these smaller jobs without paying sales tax on such materials, contrary to customary practice in the past. This will require filing of forms with their materials distributors to allow purchase without tax.
This law change has far-reaching implications to contractors and subcontractors who have historically not needed to collect sales tax. Larger, new construction or remodeling jobs generally remain exempt from tax as in the past. But the gray area in identifying the difference between the larger "capital improvement" jobs and the smaller taxable RMI jobs will be problematic. In addition, accounting records will need to be modified so that contractors can capture taxable v. nontaxable revenue and sales tax collected on jobs. Further record keeping is now needed to clearly document why you are not charging sales tax, and new filings to prevent paying sales tax twice. This is bad news for the small subcontractor. If in doubt, collect the tax.
The best guidance we have is a directive from the NC Department of Revenue, SD-16-3.
Caution: The "solely real property contractor" and other exclusions from collecting sales tax with respect to real property, discussed below, have been repealed effective 1/1/17. Please check back as we plan to post a summary of the new law soon.
Pre 1/1/2017 Executive Summary:
You are in the retail trade and required to collect sales tax on labor if:
- Your proper NAICS industry code begins with either 44 or 45. You are presumed to be a retailer, and should collect tax on all labor unless the labor is otherwise exempt (such as labor sold for resale).
- Even if your NAICS code does not begin with 44 or 45, if you are retailing a product on which you charge sales tax, then any labor associated with that product will also be subject to sales tax. Example: An auto body shop is NAICS code 88. Since the body shop (and repair shops alike) collect sales tax on parts and accessories they install to repair a vehicle, they are in the retail trade and will need to collect sales tax on labor.
- The NC Department of Revenue says that if you are selling anything at retail (and thus collecting sales tax thereon), and you provide repair, maintenance, or installation services with respect to that item sold at retail, you are a retailer and will collect sales tax on labor.
- The exceptions are very limited:
- If you solely operate as a real property contractor (see complex rules below), and/or
- The only business activity you perform is providing services, no sales of tangible personal property.
- Professional services, such as doctors, dentists, accountants, veterinarians, etc.
- Note: even though veterinarians sell products to the public, its services are not deemed RMI services and not subject to sales tax.
- Note: though the NC Department of Revenue directives do not use the following language, it is helpful to distinguish the different types of service categories:
- Standalone professional and non-professional services are generally exempt from sales tax.
- Tangible personal property services for repair, maintenance, or installation of tangible personal property which is also sold to the customer will generally require sales tax to be collected on labor also.
- Real property services (to land, buildings or other structures) will be subject to sales tax if retail sales of products exceed 50% of revenue. Note: most contractors will not have any retail sales to the public, and thus will not be subject to tax.
- If you are a real property contractor (commercial, residential, HVAC, plumbing, electrical, etc.) :
- And have no retail sales of products, then no sales tax on labor.
- And have have income from both real property contracts and retail tangible personal property, then must use the "majority of revenue" to determine if you are a retailer.
- Real property contractors with retail sales and real property contract revenue:
- Retailer-contractor: If retaill sales are less than 50% of revenue, then no sales tax on real property contracts or associated labor.
- Retailer: If retail sales are greater than 50% of total revenue, then you are a retailer, and must treat all sales as retail sales and collect sales tax on all sales, including real property contracts.
If in doubt, collect sales tax on labor until we get further clarification from the NC Department of Revenue.
Caution: If you are presently collecting sales tax on sales to your customers, read carefully.
You may need to collect sales tax on certain labor also. Generally, for sales prior to March 1, the old law provides an exemption from sales and use tax for any separately stated labor or installation costs. That exemption is repealed effective March 1.
We recognize that this is a very technical post - but there are specific issues which must be addressed and we don't want you to find yourself in difficulty.
If you have any questions on this, don't hesitate to get in touch right away and we'll help you explore how it applies to your company.
NC Sales tax needs to be collected by retailers on RMI
Beginning March 1, 2016, NC sales tax will need to be collected by “retailers” on their gross receipts from certain repair, maintenance, and installation (“RMI”) services (otherwise known as labor). The NC Department of Revenue just released critical definitions and interpretations last week, with the following directives: * Directive SD-16-1: Retail Trade * Directive SD-16-2: Repair, Maintenance, and Installation Services
The new rules present counter-intuitive results.
RMI services may be taxable or nontaxable, depending upon the service provider. For example, it is possible that one business may need to charge sales tax for a RMI service, while another business, for the very same RMI service, will not be required to collect sales tax. It is not the RMI service that determines taxability, but whether the business rendering the service falls into the definition of the “retail trade”.
Clearly, the NC DoR views this determination as a two-step process:
1) is your business a “retailer”,
2) if so, then you need to identify “repair, maintenance, and installation services” sold at retail and thus subject to sales tax.
Is your business defined as a retailer?
The first question is, is your business of the type defined as the “retail trade” and thus a retailer?
a. Presumed retail trade: NAICS business code of 44-45. If your line of business falls within Retail codes 44 or 45, you are presumed to be in the “retail trade”.
Caution: If your code is not of the 44-45 retail sector, you still may be a in the retail trade and thus, a retailer.
i. Retail trade. Double check for your proper NAICS code by Googling it. If it begins with 44 or 45, you are a retailer. Even if your code is not in the 44-45 range, you will be considered a retailer if you sell and collect(or should collect) sales tax on any products sold to customer. This includes activities of buying goods for resale, and rendering services incidental to the sale of products.
ii. Retailer. A person engaged in the business of delivering, erecting, installing or applying tangible personal property for use in this state, unless, the person is one or more of the following:
- Solely operates as a real property contractor, or
- Only business activity is providing RMI services where the business activities do not otherwise meet the definition of a retail trade.
iii. Retailer-contractor. A person that acts as a retailer when it sells tangible personal property at retail, and as a real property contractor when it performs real property contracts.
c. If your business is in the “retail trade” as defined above, then, you may not also be:
i. Real property contractor, or
Is your business exempt from RMI?
Here's a summary of some of the exemptions:
A business whose only business activity is performing RMI services, will not be treated as a retailer.
Real property contactors who derives less than 50% of its revenue from retail sales, will not be a “retailer” and will not be required to collect sales tax on RMI services.
- Example: A person’s business activity is the operation of a single hardware store in North Carolina with a Retail Trade Sector NAICS code of 44413, Hardware Stores. The sales transactions for the three months prior to March 2016 were $16,000 comprised of the following: $10,000 retail sales across the counter to and taken from the store by customers; $2,000 sales for resale; and $4,000 sales of wooden fencing to be installed at customers’ homes. Based on the NAICS code, the person is in retail trade. Further, over 50% of its sales are retail. The sales and installation of wooden fencing, on or after March 1, 2016, are retail sales by the person in addition to the retail sales across the counter.
A business that operates only as a real property contractor will not be subject to sales tax on its RMI services. A real property contractor that installs tangible personal property onto real property, but does not also sell taxable personal property at retail, is not a “retailer,” and therefore will not be required to collect sales tax on its RMI services. However, if the real property contractor sells a contract to maintain equipment, that contract will be subject to NC sales tax collected from the customer.
- RMI services specifically exclude installation services performed by a real property contractor pursuant to a real property contract. Accordingly, even if a real property contractor makes retail sales of tangible personal property, it will not be required to collect tax on its income from installation services performed as part of a real property contract.
- A real property contractor who has retails sales of greater than 50% of its total sales is classified as a retailer, and will need to collect sales tax on all retail sales and real property contracts and labor.
The following RMI services will be exempt from sales tax:
- Services performed with respect to property (other than a motor vehicle) if the property is exempt from sales tax.
- Services purchased for resale. Example: A body shop sends car to an dealership for mechanical repair, the dealership will not charge tax with the filing of form E-595E (below)
- Services 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.
Example: NAICS code 238330 (flooring contractor). 2015 sales: retail sales of carpet not installed by contractor $70,000, with $30,000 from real property contracts installed by the contractor. Effective March 1, this contractor is deemed to be in the retail trade because 70% of sales are taxable retail sales. Contractor must treat all transactions after March 1 as retail sales with customers and collect sales tax, even though before March 1 the business was able to exclude real property contracts from tax.
Example: Business sells at retail (2015 $4,000,000) and installs (2015 $1,000,000) septic tank components and systems. With 80% ($4M/$5M) of its sales from retail, the business is a retailer and must treat all sales transactions after March 1 as retail sales, including sales of installed septic tanks.
Example: Business sells kitchen cabinets at retail ($500,000 over last 3 years) and kitchen remodeling ($1,500,000 over the last 3 years). With 75% ($1.5M /$2.0M) of revenue for the 3 years being remodeling contracts for real property, this business does not meet the definition of “retail trade” with only 25% of its revenue from retail sales. This business is a “retailer-contractor”.
Example: For March, April and May 2016, an HVAC business has the following revenue:
- $4.0M real property contracts to install HVAC in NC
- $3.0M real property contracts to install HVAC outside of NC
- $0.9M from one-time HVAC repair charges in NC
- $0.7M from one-time HVAC repair charges outside of NC
- $0.8M from service contracts for HVAC compressors in NC
- $0.6M from service contracts for HVAC compressors outside NC.
Prior to March 1, this business operates as a real property contractor. Effective March 1, NC retail revenue is 14% ($0.8/$5.7M) of total revenue in NC, thus this business is not in the “retail trade”. As a retailer-contractor the business will now collect sales tax on service contracts, even though the personal property covered is part of or affixed to real property.
Example: A carpet installation contractor, who does not sell carpet at retail, agrees to provide the carpet, padding, supplies and labor to complete the contract. The business does not sell carpet at retail from any location, in or out of NC, but purchases the carpet, padding and supplies on an as needed basis from sellers and pays tax at the time of purchase on such items. This business is not in the “retail trade” since it is solely operating as a real property contractor.
Identification of RMI services
Sales and Use Tax Directive CD-16-1 defines RMI services:
- 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, including replacing or putting together what is torn or broken.
- To troubleshoot, identify, or attempt to identify the source of a problem for proper working order or good condition.
- To install or apply tangible personal property, except tangible personal property install or applied by a real property contractor pursuant to a real property contract.
Example: A retailer of appliances will be required to collect sales tax for a service call to troubleshoot an issue for the customer.
Exception: A person whose only business activity is providing RMI services, and does not meet the definition of “retail trade”, is not a retailer and is not liable for sales or use tax on its gross receipts from RMI services.
Example: A person whose only service is sharpening scissors or knives owned by customers, and does not meet the definition of “retail trade”, is not liable for tax on receipts from scissor or knife sharpening services, even though sharpening is an RMI service.
Exception: A person that operates as a real property contractor is not a retailer of RMI services and is not liable for sales tax on such RMI services.
Example: A person engaged solely in the business of installing and repairing in-ground septic tank systems is a real property contractor.
Example: A person sells and installs septic tank systems. If retail sales of septic tanks exceeds 50% of its revenue, then the business will be considered a retailer-contractor and all tank sales plus RMI services will be subject to sales tax.
Some (but not all) examples of RMI services. Note, these are taxable if sold by a “retailer”. Remember, you are considered a retailer if you sell any items and collect sales tax thereon. Solely providing services will not cause taxation:
- Service or tune up of auto, mower, trimmer, generator, bike…
- Calibrate watch, gun scope, surgery equipment, trumpet
- Clean jewelry, copy machine, printer
- Remove dents, dings on an auto
- Patch or reupholster furniture
- Patch or mend clothing
- Sharpen blades
- Polish shoes, jewelry
- Re-string tennis rackets, re-grip golf clubs or musical instruments.
Example: Auto repair shop purchases and installs a motor into a customer's auto. The motor and the labor to install are taxable.
Example: Auto repair shop does not purchase or sell any repair parts. It only installs parts provided by the customer, and only charges for labor. Labor will be exempt from sales tax.
- An item exempt from tax under 105-164.13 or 105-164.13E for farmers. Example: Sales tax should not be charged for repair work on a tractor used by a qualifying farmer for use in farming operations.
- RMI service for custom computer software are exempt.
- RMI services to a telephone company
- RMI services for broadcasting equipment and parts
- Network assets of a utility
- Certain auto parts purchased by pro motorsports team.
- Mill machinery, mill parts, and accessories subject to the 1% privilege tax. Example: A retailer visits a manufacturing facility to troubleshoot. The retailer cleans and calibrates equipment and does not install anything new. This charge meets the definition of an RMI service; however, if the retailer obtains property exemption documentation, these RMI services will not be subject to sale or use tax or the 1% privilege tax.
- A qualified aircraft or jet engine.
- RMI services purchased for resale. Example: An auto body repair shop purchases tire alignment and balancing services from a tire retailer for repair of a customer’s wrecked auto. This is an exempt RMI service for resale.
- An “item” or RMI service pursuant to a tangible personal property service contract if the purchaser of the contract is not charged for the “item” or RMI services. The term “item” does not include a tool, equipment, supply, or similar tangible personal property used to complete the maintenance or repair and that is not deemed to be a component or repair part of the tangible personal property for which the service contract was sold. Example: Copy machine retailer sells a service contract, written by an obligor, to their customer at retail on which sales tax was properly collected at the time of sale. The customer calls the obligor for service. The obligor contracts with the retailer to handle the service. The retailer does not employ repairmen but, instead, hires a third-party repair company. The sale of any item or RMI service to the copy machine retailer or to the obligor are not subject to sales or use tax if proper exemption documentation is provided. viii. The seller must obtain (and buyer should provide) Form E-595E Certificate of Exemption to properly document that qualifying RMI services are exempt from sales and use tax. Form E-595AE is the seller’s authority to exempt the sale. Alternatively, the data elements, as required by NC G.S. 105-164.28(a), may be provided to the seller. A person who does not collect the proper sales or use tax, and does not properly document an exemption remains liable for the sales and use tax.
Exceptions: Following are some transactions not considered RMI services:
- Safety or emission inspections for motor vehicles.
- Safety or compliances inspections required by a government, such as fire extinguishers, sprinklers, etc.
- Septic tank pumping services.
- Self-service cleaning of tangible personal property or vehicles.
- Housecleaning, janitorial, power washing, gutter cleaning.
- Lawn maintenance services.
- Examples of some, but not all, activities, if the provider does not meet the definition of “retail trade” and does not sell any tangible personal property to the customer:
- Pest control.
- Parking lot striping or sealing.
- HVAC repair.
- Garage door repair.
8. A contractor or subcontractor that purchases RMI services to fulfill a lump-sum or unit-price contract that was entered into or awarded pursuant to a bid made prior to March 1 may purchase RMI services without payment of sales or use tax if documented with Form E-589J (which is currently being amended).
There remain many unanswered questions. For the percentage of revenue test, what lookback period is used? 3 months, 12 months? And if that percentage goes over one month but back the next, is that a retailer?
If in doubt, collect sales tax. Otherwise, if you do not collect sales tax, and you should have collected it, you are still liable for paying the tax.
If you're left with unanswered questions, or more questions than you had when you began reading this post, please get in touch.