NORTH CAROLINA ADOPTS SALES TAX FOR SERVICE CONTRACTS EFFECTIVE JANUARY 1, 2014

Glenn Bailey, CPA

In July of 2013, North Carolina adopted N.C. Gen. Stat. § 105-164.4(a)(11), which imposes the 4.75% general State and applicable local and transit rates of sales and use tax “to the sales price of a service contract” sold by a retailer on or after January 1, 2014 and sourced to this State.

N.C. Statutes define “service contract” as “a warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property.” They also define “tangible personal property” as “personal property that may be seen, weighed, measured, felt, or touched or is in any other manner perceptible to the senses. The term includes electricity, water, gas, steam, and prewritten computer software.”

A single repair transaction or installation of a product as part of a transaction between a retailer and a purchaser for tangible personal property that is not completed pursuant to a “service contract” sold to a purchaser is not a taxable service. The tax does not apply to a contract where a person agrees to maintain, service, or repair real property or an item of tangible personal property permanently attached to real property, if the contract is sold to the purchaser after the item is installed. A service contract sold at the same time as the item would be subject to tax.

The regular North Carolina rules about being “engaged in business” in the state and sourcing of sales transactions applies. N.C. Directive SD-13-5 has the details and some examples of taxable and non-taxable transactions. Please consult your tax advisor if you are doing business in North Carolina to ascertain the applicability of this new rule to your business activities.

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