January 2017 SALT Tax Alert - North Carolina Expands Taxability of Repair, Maintenance and Installation Services Effective January 1, 2017 Tony Buffkin, Director State & Local Tax The North Carolina General Assembly enacted legislation which made several key changes to the taxability of repair, maintenance and installation (RMI) services performed on tangible personal property and also expanded the tax base to include certain RMI services performed on real property. Please note that this Tax Alert provides a summary of the law changes and guidance issued by the NC Department of Revenue and is not intended to be a comprehensive overview. Effective January 1, 2017, the definition for retail trade was repealed; therefore, a person s business classification or majority of revenue no longer affects the taxability of RMI services. Also, effective January 1, 2017, NC sales and use tax will apply to the sales price of or gross receipts derived from many repair, maintenance and installation services performed on real property, unless the transaction meets the definition of a capital improvement (which is discussed in detail below). Capital Improvements If a transaction meets the definition of a capital improvement to real property, the transaction will be taxed in the manner that real property contracts have traditionally been taxed. In other words, the real property contractor is considered to be the end user of tangible personal property, digital products or services that the contractor purchases, installs or applies to fulfill the real property contract and is therefore subject to paying sales or use tax on the cost price of those. Under the correct application of the sales and use tax law, there is no sales tax charged by the real property contractor on the amount of the real property contract. The term capital improvement is defined in the statutes as any of the following: construction, reconstruction or remodeling of a building, structure or fixture on land that becomes part of the real property.
construction, reconstruction or remodeling of a building, structure or fixture on land that is permanently installed to the real property so that removal would cause material damage to the property or article itself. construction, reconstruction or remodeling of a building, structure or fixture on land that is permanently applied to the real property so that removal would cause material damage to the property or article itself. An addition or an alteration to real property for or by a lessee or tenant, provided it is intended to become a permanent installation and title to it vests in the owner or lessor of the real property immediately upon installation. A capital improvement includes, but is not limited to, all of the following: Removal of items from real property, such as debris, construction materials, asbestos or excavation activities, including the removal of items from a structure such as a dumpster. Performance of work that requires the issuance of a permit under the State Building Code, other than repair or replacement of electrical components, gas logs, water heater and similar individual items that are not part of new construction, reconstruction or remodeling. Installation of underground utilities. Installation of equipment or fixture that is attached to real property so that removal of the item would cause physical, functional or economic damage to the property and that is capitalized under one or more of the following: the Internal Revenue Code, Generally Accepted Accounting Principles or International Financial Reporting Standards. Painting or wallpapering. Replacement or installation of a roofing, septic tank, plumbing, electrical, commercial refrigeration, irrigation, sprinkler or other similar system. Replacement or installation of a heating, ventilation and air conditioning unit or system. Replacement or installation of roads, driveways, parking lots and sidewalks. Landscaping service, which is defined by statute as a service to maintain or improve lawns, yards, or ornamental plants and trees. Examples include the installation of trees, shrubs, or flowers; tree trimming; lawn mowing; and the application of seed, mulch, pesticide or fertilizer to a lawn or yard. Capital improvements do not include the following: An addition or an alteration to real property for or by a lessee or tenant where title to the addition or alteration to real property does not vest in the owner or lessor of the real property immediately upon installation, no matter that the addition or alteration may be intended to become a part of real property. The replacement of a fixture in or on a building or structure unless the replacement is part of a remodeling. A single repair, maintenance or installation service. The term new construction is defined as construction of or site preparation for a permanent new building, structure, or fixture on land or an increase in the square footage of an existing building, structure or fixture on land. Reconstruction is defined to mean rebuilding or constructing again a prior existing permanent building, structure, or fixture on land and may include a change in the square footage from the prior existing building, structure or fixture on land. Remodeling is defined as the process of improving or updating a permanent building, structure or fixture on land or major portions thereof. The term also includes renovation. Form E-589CI, Affidavit of Capital Improvement Form E-589CI, Affidavit of Capital Improvement, is generally required to substantiate that a contract, or a portion of work to be performed to fulfill a contract, is to be taxed for sales and use tax purposes as a real property contract with respect to a capital improvement to real property. The failure to issue Form E-589CI for a qualifying transaction will subject the transaction to tax as a retail sale (i.e., the gross receipts from the entire transaction will be subject to sales or use tax). The Form is not required to be issued for painting or wallpapering real property or for landscaping services. Form E-589CI generally is issued by the person hiring another party to perform work that qualifies for a capital improvement, with certain exceptions. For example, a property owner would issue the form to a general contractor that it hires or for subcontractors that it hires directly. A general contractor would issue the form to sub-contractors that it hires, and subcontractors would then issue the form to any sub-contractors it hires. 2
However, for new construction or reconstruction, a property owner is not required to issue Form E-589CI to a general contractor it hires to oversee the entire contract. If the property owner oversees a new construction or reconstruction project and hires sub-contractors directly, it should issue the form to each sub-contractor. In addition, a property owner should issue Form E-589CI to its general contractor or any subcontractors it hires directly for any remodeling project. A general contractor is required to issue Form E-589CI to its sub-contractors, regardless of whether the project is new construction, reconstruction or remodeling. The form can be issued for single use when a homeowner or property owner remodels and oversees the entire activity, or when a real property contractor hires a sub-contractor and there is not a recurring business relationship between the two parties. A blanket use form generally may be issued for the following: A builder who hires the same real property contractor(s) only for new construction. A real property contractor who hires the same subcontractor(s) only for reconstruction. A real property contractor who hires the same subcontractor(s) for remodeling and the activities performed by the subcontractor(s) are never repair, maintenance and installation services for real property. A real property contractor who exclusively hires the same subcontractor(s) to perform part, or all, of its real property contracts with respect to capital improvements for real properties. Repair, Maintenance and Installation Services Related to Real Property As noted above, a capital improvement does not include a single repair, maintenance or installation service. Those services performed on real property are subject to sales or use tax unless there is a statutory exemption for the service. For example, a property owner who purchases tangible personal property from a retailer and performs its own installation should pay sales tax to the retailer on the sales price of the tangible personal property. If the property owner purchases tangible personal property from a retailer and hires a handyman to perform the installation, the property owner should pay sales tax to the retailer on the sales price of the tangible personal property and pay sales tax to the handyman on the installation labor charge. If the property owner hires a person to perform repair, maintenance or installation services where the person purchases tangible personal property for the service and performs the installation, the property owner should pay sales tax to the person on the total sales price of the repair, maintenance and installation service. The following examples of services are generally considered repair, maintenance and installation services for real property when performed as a single service and are subject to sales or use tax. HVAC repair for an air conditioning or heating unit that is not working properly. Rekey locks for real property by a locksmith. Repair of a water pump motor. Repair to correct a jammed garage door. Electrical repair due to a light switch or receptacle not working properly. Plumbing services to unclog a drain. Plumbing services to identify and repair a leak in a pipe. Services by a roofing company to identify and repair a roof leak. Replace damaged exterior bricks. Replace or repair of a storm door or garage door. Repair or replace countertops. Replace or reface kitchen cabinet doors. Repair or replace a water heater. Repair of a liner for a swimming pool. Repair or replace a single light fixture. Carpet or linoleum install for a single room. Repair or replace single plumbing fixture (e.g., toilet or sink). Replacement of plate glass window. 3
Repair, Maintenance and Installation Services for Tangible Personal Property or a Motor Vehicle The following list are examples of services generally classified as repair, maintenance and installation services for tangible personal property or a motor vehicle. Please note that this list is not all-inclusive. Performance of a service or tune-up on the following: motor vehicle; small engines such as a lawnmower, trimmer, edger, leaf blower, pressure washer, generator, chainsaw, tiller or auger; boat; aircraft; ATV or dirt bike; moped; golf cart; or bicycle. Calibrate any of the following: watch, scale, gun or scope, medical equipment, Lasik surgery equipment, thermometer, instruments (musical or otherwise), battery, meter, or camera. Clean jewelry, copy machine, printer or motor vehicle. Remove dents, dings and scratches from tangible personal property or a motor vehicle. Restore or reupholster furniture. Patch or mend tires or any type of inflatable. Sharpen blades. Polish jewelry or silver. Troubleshoot a fluid leak or attempt to identify an unusual noise coming from a motor vehicle or other tangible personal property, whether or not the source of the leak or noise is located, determined or resolved. Troubleshoot prewritten computer software to determine how to restore to proper working order. Reupholster boats. Re-string or re-grip tennis rackets, golf clubs or musical instruments. Tune pianos or other musical instruments. Repair laptops, cell phones, remove viruses/malware, conduct diagnostic tests or adjust computer settings. Painting tangible personal property. Window tinting for motor vehicles. Exemptions Related to Repair, Maintenance and Installation Services Repair, maintenance and installation services provided for the following items are exempt from tax: An item exempt from tax under N.C. Gen. Stat. 105-164.13 or 105-164.13E, except for a motor vehicle. This does not apply to water maintained for a pool, fish tank or similar aquatic feature. A transmission, distribution or other network asset contained on utility-owned land, right-of-way or easement. A transmission, engine, rear-end gears and any other item purchased by a professional motorsports racing team or a related member of a team for which the team may receive a sales tax refund under N.C. Gen. Stat. 105-164.14A(a)(5). An item subject to tax under Article 5F of Chapter 105 of the General Statutes. This includes any item subject to the 1% privilege tax for Certain Machinery and Equipment. A qualified aircraft or a qualified jet engine. Sales of or the gross receipts derived from the following repair, maintenance and installation services are exempt from tax: A fee or charge for an inspection required by law, regardless of whether the amount is paid to a public or private entity, provided the charge is separately stated on the invoice or other documentation provided to the purchaser at the time of the sale. This exemption applies to any inspection required by a governmental entity. Examples of items where an inspection may be required by law include (list not allinclusive): motor vehicles, fire extinguishers, alarm/ sprinkler systems, certain slicers, grinders and balers, backflow valves. Services performed for a person by a related member. Services performed to resolve an issue that was part of a real property contract if the services are performed within six months of completion of the real property contract or, for new construction, within 12 months of the new structure being occupied for the first time. Cleaning of real property, except where the service constitutes a part of the gross receipts derived from the taxable rental of an accommodation or for a pool, fish tank or other similar aquatic feature. 4
Services on roads, driveways, parking lots and sidewalks. Removal of waste, trash, debris, grease, snow and other similar items from tangible personal property, including a motor vehicle and real property, but does not include removal of waste from portable toilets. Home inspections related to the preparation for or the sale of real property. Landscaping service. Alteration and repair of clothing, except where the service constitutes a part of the gross receipts derived from the taxable rental of clothing or for alteration and repair of belts and shoes. Pest control service. Moving services. Self-service car washes. Services purchased for resale under an exemption certificate or under a direct pay permit. Services used to maintain, monitor, inspect or repair tangible personal property or digital property pursuant to a taxable service contract if the purchaser of the contract is not charged for the services. This does not apply to a tool, equipment, supply or similar tangible personal property that is not deemed to be a component or repair part of the tangible personal property or digital property for which a service contract is sold to a purchaser. Services used to maintain or repair tangible personal property or a motor vehicle pursuant to a manufacturer s warranty or a dealer s warranty. Repair, maintenance and installation services purchased by a qualifying farmer or condition farmer. Retailer-Contractors In many cases, a business may make retail sales of tangible personal property, digital property, taxable RMI services or service contracts, and may also perform real property contracts. In those cases, the business meets the definition of a retailer-contractor which is defined as a person that acts as a retailer when it makes a sale at retail and as a real property contractor when it performs a real property contract. A retailer-contractor that purchases tangible personal property or digital property to be installed or applied to real property or a service to fulfill the contract may purchase those items exempt from tax using Form E-595E, Certificate of Exemption, provided the retailer-contractor also purchases inventory items or services from the seller for resale. When the property is withdrawn from inventory and installed or applied to real property, or when the service is deemed to be used, use tax must be accrued and paid on the retailercontractor s purchase price of the property. Property that the retailer-contractor withdraws from inventory for use that does not become a part of real property is also subject to sales and use tax. Purchasing Tangible Personal Property and Digital Property Any tangible personal property or digital property that becomes a part of or is applied to property in the performance of taxable repair, maintenance and installation services should be purchased exempt from sales and use tax. A person who is a real property contractor prior to January 1, 2017, and who as a result of the changes in the sales and use tax laws effective January 1, 2017, is a retailer-contractor or retailer who makes retail sales of repair, maintenance and installation services to real property on or after January 1, 2017, may purchase tangible personal property, digital property or services without payment of sales or use tax prior to January 1, 2017, provided at the time of purchase it is known that those items or services will be part of the sales price of or gross receipts derived from repair, maintenance and installation services sold at retail on or after January 1, 2017. Contractors who have an inventory of parts, supplies other tangible personal property, or digital property where sales or use tax was properly paid prior to January 1, 2017, and where those items will be transferred as part of taxable repair, maintenance and installation services to real property on or after January 1, 2017, are not allowed to take a credit against the sales tax due on the sales price of or the gross receipts derived from the taxable repair, maintenance and installation services for any sales or use tax originally due and paid at the time of purchase of those parts, supplies other tangible personal property or digital property. Tony Buffkin, CMI Director 704.367.7057 tony.buffkin@dhgllp.com 5