On July 1, 2016, as the NC Legislature was winding up its short session, it passed House Bill 1030, Current Operations and Capital Improvements Appropriations Act of 2016, also known as the Budget Bill. In it are a number of significant changes to current sales tax statutes. The bill was presented to the Governor and awaits his signature, which is expected soon.
The most significant sales tax changes included in HB 1030 affect taxation of repair, maintenance and installation (RMI) services. These are services performed on tangible personal property. Effective March 1, 2016, not even five months ago, new rules went into effect making certain RMI services taxable. You can read more about those rules here.
Depending on various factors, under these current rules, the following services could be taxable: jewelry polishing, installation of plumbing fixtures, automotive repairs and installation of flooring. However, taxability depends principally on the nature of the company providing the service. This results in these services being taxable when provided by some companies, but the identical service may not be taxable when provided by a different company. This has understandably led to a lot of confusion and uncertainty for both companies and consumers.
The legislature attempted to address this confusion and inequity with HB 1030. For example, in the current law, a significant consideration is whether or not a company is in “retail trade”, a conclusion reached by either meeting certain industry classifications or analyzing the source of the company’s revenues. A business classified as a retail trade is required to tax all RMI services unless one of a few narrow exceptions is met. This particular provision resulted in many services performed as part of real property contracts being taxable. HB 1030 removes all references to “retail trade”, making the determination for many taxpayers much simpler.
However, effective January 1, 2017, HB 1030 results in many other RMI services being taxable. The default provision is that all RMI services will be taxable unless specific exceptions are met. One notable exception is for RMI services performed on tangible personal property that becomes part of real property and qualifies as a “capital improvement.” For example, a hot water heater and an HVAC unit are tangible personal property that become affixed to real property. If either of these is installed as part of a new construction project, reconstruction or remodeling project (these terms are specifically defined), then the installation charge would not be taxable. However, if the installation is done merely to replace an existing unit, the installer will be obligated to impose sales tax on the labor charge. Interestingly, the installation company might not readily know whether or not the work is part of a capital improvement project, so they may not know to tax the installation charge.
Other exceptions in HB 1030 include landscaping services; snow removal; pest control services; self-service car washes; clothing alterations; services on roads, driveways, parking lots and sidewalks.
Many other services, however, are at risk of becoming taxable on January 1, 2017. While much clarity is needed, newly taxable services could include the following: minor home repair services, rekeying of doors, swimming pool cleaning, hardwood floor refinishing or polishing and replacing kitchen cabinets (not part of a reconstruction or remodel). In addition, many of the RMI services that are taxable under the currently enacted rules will continue to be taxed. The sale of most service contracts also continues to be taxed.
HB 1030 is expected to create many new tax collectors; as most real property contractors are not registered to collect sales tax. Fortunately, this bill also allows the Department of Revenue to relieve taxpayers that fail to collect on RMI services so long as they made a good faith effort to comply with the rules. This relief applies retroactively to taxes collectible as of March 1, 2016 and through December 31, 2022.
This information is necessarily brief and does not address all of the changes included in HB 1030. The Department of Revenue is required by the bill to issue guidance on the application of the rules by November 15, 2016. JPS Shareholder Rollin Groseclose serves on a task force of the NC Association of CPAs, which has been invited to discuss these matters with the Department in the coming months.