Co-authored by Chris Foster, estate planning attorney
While most of us are accustomed to paying sales tax at the grocery store and department store, most people are not used to paying taxes on services provided to the consumer. However, recent changes to North Carolina tax laws make it mandatory for service providers to tax those that benefit from some services. One particular area in which these new service contract sales tax laws may affect you concerns your home.
What is a sales tax?
Believe it or not, sales tax is defined as a tax imposed on the sale of goods AND services. In North Carolina, a percentage of the good or service is taxed. The amount collected is then allocated among State and local municipalities. For example, in Cumberland County, sales tax is 7.00% of the price charged, which includes the 4.75% for the State and 2.25% for county taxes.
Previously, the North Carolina General Statutes provided that sales taxes did not apply to the purchase amount of a service contract for tangible personal property that will or may become part of real property. Under the new laws, the cost a consumer pays for a service contract is subject to sales tax regardless of whether the property covered in the service contract becomes a fixture to real property.
A service contract is defined under the Statutes as an agreement where the person responsible for providing the service agrees to maintain, monitor, inspect, or repair digital property or tangible personal property for a period of time whether the property becomes a permanent part of the real estate. Examples of service contracts include warranty agreements other than a manufacturer’s warranty provided at no charge to a purchaser, an extended warranty, a maintenance agreement, or a repair contract. Thus, under the current laws, if a person purchases a new refrigerator and elects to purchase the extended warranty, they will be charged sales tax on both the purchase of the refrigerator AND the purchase of the warranty. Similarly, if you hire a plumber to repair a sink in your house, the maintenance provided by the plumber will yield a sales tax to the homeowner. Repairs to heating, air conditioning, and electrical contractors are also subject to sales tax. Even the contractor who installs new carpet in your home will charge you sales tax.
So, am I being taxed on everything now?
After reading this, you may think that you will pay sales taxes every time you spend money on your home, but there are several exceptions to these new laws. Some of the exemptions for sales tax include the following:
- Repairs or maintenance to resolve an issue that was part of a real property contract if the services were performed within 6 months of the real property contract
- Repairs or maintenance to resolve an issue related to a new construction home if the services were provided within 12 months of the occupancy of the home
- Cleaning of real property
- Repairs to driveways and sidewalks
- Trash and waste removal
- Home inspections related to the preparation for or sale of real property
- Landscaping services
What do these laws mean to you?
For most of you, the laws related to sales tax on services will likely only lighten your wallet more than you are accustomed. Receipts for some of the services provided to real property will exhibit a new line item that says sales tax at a percentage based on the county. It is important to note that these increases are not due to the service provider raising its prices. Instead, the amounts are being collected by the service provider for the North Carolina Department of Revenue and local government agencies.
In addition, the impact of the changes in the law is much more complex for the business owner rather than the consumer. By default, the service provider is responsible for charging the sales tax and remitting it to the proper agency. These new laws require business owners to implement new processes and procedures, which, in turn, increase the internal costs of the business.
As the consumer, you will not have to keep a record of all of the sales taxes you paid throughout the year nor make sure that the service providers are in compliance and charging sales tax (at least not yet).
These are just some of the new laws related to sales and use taxes, but it is not an all-encompassing list. If you are a business owner that believes these new laws may impact your business, we suggest you contact a CPA or tax attorney to provide guidance on these issues.
Published by Susan R. Benoit on March 6, 2017