Client Alert: Expansion of Sales Tax in North Carolina Requires Reexamination of Service Contracts
In March of 2016, the General Assembly expanded the North Carolina sales and use tax to make the provision of certain repair, maintenance and installation (RMI) services taxable. However, significant confusion resulted as not all providers were subject to the new requirement. In response to the confusion, and effective January 1, the requirement will be further expanded. If you provide any RMI services, you will need to examine the services you provide in order to determine if you need to assess sales and use taxes in the New Year.
Three main changes will take effect on January 1, 2017. First, the definition of a “retailer” has been expanded to include nearly all RMI service providers. Second, the tax has been expanded from tangible personal property to RMI services on digital property (see discussion below). Third, the taxes now are imposed on RMI services related to real property.
The revisions that took effect in March provided an exception from taxation for RMI service providers whose only business activity was providing RMI services, and whose activities do not otherwise meet the definition of a retail trade. This meant that two different companies could provide identical RMI services, with one being subject to sales tax and the other not. To address the confusion this generated and to reduce inequity among providers, the exception has been dropped: businesses which only provide RMI services are now included and must charge sales tax on their service contracts for RMI.
This is a major change, as it sweeps in many businesses that have not previously had to charge sales and use taxes. For example, a company providing only IT support services, such as remote troubleshooting of office computer systems, would not have been required to charge sales and use tax despite the March revisions. This is because (even though the Department of Revenue has issued guidance indicating that troubleshooting computer software and repairing computers falls under RMI) such a company would not have been considered a “retailer.” However, effective January 1, all providers of such services will be taxable as a retailer providing RMI services with respect to tangible personal property (which includes prewritten computer software). Note, however, that custom software, and service contracts for RMI of custom software, were previously and currently remain exempt from sales tax. Custom software refers to software or programs written specifically for the customer and to their specifications, as opposed to prewritten or “canned” software, such as Microsoft Office.
The other major changes to take effect on January 1 is the imposition of sales and use tax on RMI series with respect to digital property (i.e. audio works, audiovisual works, publications, photographs, each delivered or accessed electronically) and real property. Though there are many exceptions as applied to real property (landscaping, snow removal and pest control, to name a few), the expansion to real property RMI is a large one and its extent is not yet very clear.
Going forward, it’s time to consider whether any services you provide will now be subject to sales and use taxes. You should not be surprised if your service providers begin to charge for sales tax.
The attorneys at Hutchison PLLC are here to help. If you would like us to review the RMI services you provide and determine whether your particular business must begin charging sales and use tax, please contact any of your regular Hutchison attorneys, Amalie Tuffin or Ashley Pittman.
This Alert is provided for informational purposes only and is not intended to be, nor should it be construed as, legal advice on any specific matter, nor does it represent any undertaking to keep recipients advised of all relevant legal developments. This Alert does not create or constitute an invitation to create an attorney-client relationship, nor should it be construed as an advertisement or solicitation for legal services. This material may be considered Attorney Advertising in some states. Prior results do not guarantee a similar outcome.
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