On July 23, 2013, North Carolina Governor Pat McCrory signed into law House Bill 998, the Tax Simplification and Reduction Act (the Act). This legislation made important changes to the North Carolina tax code and included reforms to the state’s individual income tax, corporate income tax, and sales and use tax. Among numerous significant changes, the Act extends the application of the North Carolina sales tax to sales of service contracts beginning on January 1, 2014.
- Taxable Service Contract Defined
- Effective January 1, 2014, North Carolina will begin imposing the 4.75% general State and applicable local sales tax rates to the sales price of a service contract sold at retail by a retailer on or after January 1, 2014 and sourced to this State. “Service contract” is defined as a warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property. “Tangible personal property” is defined as personal property that may be seen, weighed, measured, felt, or touched or is in any other manner perceptible to the senses. The sale, purchase, or withdrawal from inventory of an item on or after January 1, 2014, and used to maintain or repair tangible personal property pursuant to a service contract entered into before, on, or after January 1, 2014 is exempt from sales tax provided the purchaser of the service contract is not charged for such item.
- Single Repair Transactions Not Covered by a Service Contract are Exempt
- A single repair transaction between a retailer and a purchaser for tangible personal property that is not completed pursuant to a service contract sold to a purchaser is not a service contract for purposes of this new tax. For example, a retailer that sells and installs an alternator for a motor vehicle, where such transaction is not completed under a service contract, continues to be subject to the 4.75% general State and applicable local sales tax rates on the retail sales price of the alternator. The amount charged by the retailer to the purchaser for installation of the alternator is exempt from sales tax provided the installation labor is separately stated on the invoice or similar billing document given to the purchaser at the time of sale.
- Contracts to Maintain, Service, or Repair Real Property or Personal Property Attached to Real Property
- The sales tax does not apply to a contract where a person agrees to maintain, service, or repair real property or an item of tangible personal property permanently attached to real property, provided such contract is sold to a purchaser after an item of tangible personal property is permanently attached to real property. For example, where a purchaser buys a house that has garage doors on the garage and such person subsequently purchases a contract for an annual garage door service agreement that covers all repairs without an additional charge within the contract period, such contract is not the sale of a service contract subject to tax. Another example is an HVAC contractor who sells a service contract, the sales price of which is $200, to a customer on January 1, 2014. The service contract provides that the HVAC contractor will service, maintain and repair the customer’s HVAC for a period of one year. The HVAC service contract is not subject to sales tax as the HVAC system is attached to real property at the time of the sale of the contract and is not a contract by which the seller agrees to maintain or repair tangible personal property. The HVAC contractor continues to be subject to the 4.75% general State and applicable local sales tax rates for repair parts and supplies for use in providing the service contract to the customer.
- Sales Tax Applicable to Receipts for Certain Service Contracts Entered Into Prior to January 1, 2014
- Sales tax is applicable to receipts for certain service contracts entered into prior to January 1, 2014. For a taxable item that is provided and billed on a monthly or other periodic basis, the new tax applies to the first billing period that starts on or after January 1, 2014. That is, a billing period for a taxable service contract billed on a monthly or other periodic basis that begins on or after January 1, 2014, is subject to sales tax no matter that the contract was executed prior to January 1, 2014. For example, a service contract for a motor vehicle that provides for oil changes for a three-year period, is billed on a monthly basis. The 4.75% general State and applicable local sales tax rates apply to the gross receipts for the service contract for billing periods that begin on or after January 1, 2014. For a taxable item that is not billed on a monthly or other periodic basis, the tax change applies to amounts received for items provided on or after January 1, 2014. For example, the sales price of a three-year extended warranty contract entered into, billed and collected in full on December 24, 2013 to maintain or repair a motor vehicle is not subject to sales tax no matter that the contract is in effect for periods beginning on or after January 1, 2014. An otherwise non-exempt service contract entered into on or after January 1, 2014 for an annual basis is subject to sales tax.
- Separately State Sales Tax on Invoice
- Where the retailer bills for the sale of a service contract sourced to this State, such retailer should separately state the 4.75% general State and applicable local sales tax due on the invoice or other similar billing document given to the purchaser at the time of the sale.
- Cancellation or Refund of a Service Contract
- Where a service contract subject to tax is canceled at any time after the date of sale, no portion of the applicable State or local sales tax rates charged on the sales price of the service contract should be refunded to the purchaser by the retailer. Additionally, the retailer should not take a deduction from taxable sales or deduct a credit from tax due on Form E-500, Sales and Use Tax Return, filed with the Department as a result of any portion of a the refund of a service contract to a customer.
For more information, including exceptions to the new law and a list of exemptions, here is a link to the North Carolina Department of Revenue’s Directive.
If you would like more details about the new law and how it might impact you, please do not hesitate to call our office at 910.323.3100.
This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. McFadyen & Sumner, CPAs PA is not responsible for any loss resulting from or relating to reliance on this document by any person.