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Sales tax on some services takes effect

RALEIGH New sales taxes on labor for a number of retail services ranging from cabinet installation to floor repair take effect this week as part of Republican efforts to reduce the state’s reliance on income taxes in favor of those based on consumer transactions.

Previously, such businesses generally charged tax on parts but not on labor.

Combined state and local taxes will amount to around 7 percent on the transactions, but the rate will vary by county.

J. Michael Carpenter, general counsel for the North Carolina Home Builders Association, released a statement explaining some of the impact builders and contractors could see from the new tax law.

“If a builder uses a subcontractor who sells and installs goods or services (e.g., flooring contractor, HVAC contractor, etc.) directly to the public, the builder should conduct an inquiry of that subcontractor to determine if sales and use tax will be due on that subcontractor’s services with respect to the particular project,” Carpenter said in the statement.

He said that for many, if not most, residential construction activities, there is no change in the law and no sales and use tax on labor will be owed.

There is no change in the law for a builder who purchases tangible personal property and installs it – either personally or by using the person’s own employees – in a new home under construction or in an existing home being remodeled.

Simply having a retail component is not enough to subject a business to the new tax.

But sales tax may be due on labor if retail trade is a majority of a subcontractor’s revenue, Carpenter said in the release.

The state’s department of revenue uses this example with regard to construction work: For the 2015 calendar year, a person who sells septic tank components at retail locations and installs septic tanks in real property had total revenue of $5 million. Of the $5 million, $4 million was from the retail sale of septic tank components and $1 million was from installation.

The person’s revenue is 80 percent from retail sales of component parts. Effective March 1, the person is deemed to be in ‘retail trade’ and is a retailer and must treat all sales as retail sales, even though prior to that the business was permitted to operate as a retailer-contractor.

The GOP-led General Assembly approved the expansion of the sales tax last September in the two-year state budget, which was also signed by Republican Gov. Pat McCrory. Part of the millions of dollars in new revenue will be redistributed to small and rural counties.

Republicans have argued that a broader package that includes the changes reduces taxes overall for residents. The budget law cut the individual income tax rate starting in 2017 and raised standard deductions starting this year.

Sen. Bob Rucho, R-Mecklenburg, said Monday that the income tax changes will benefit workers with each paycheck. The sales tax on a car repair, meanwhile, may only occur a couple of times a year, he said.

The additional sales tax is “more than offset with the amount of personal income tax savings,” said Rucho, co-chairman of the Senate Finance Committee. Rucho said the sales tax expansion is part of a yearslong effort to shift the state’s revenue base from one that relies on income tax to one that relies on consumption-based taxes. Democrats and their allies, however, have said the expanded sales tax will hurt families that have less disposable income.

“The additional sales taxes are nothing more than a veiled lower-to-middle income tax increase,” state Sen. Dan Blue of Wake County, the Senate’s Democratic leader, said in a news release. “Car and home repairs are stressful and much more costly to lower income families that pay a higher percentage of their income toward these expenses.”

Staff and wire reports

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