North Carolina Sales and Use Tax Alert

If you are a contractor performing work in North Carolina or have engaged a contractor to perform work for you in North Carolina, you need to be aware of the confusion surrounding the state’s sales and use tax law changes that took effect January 1, 2017.

The Smith and Howard Sales and Use Tax team has uncovered many instances in which reporting has been incomplete or incorrect – potentially costing businesses thousands of dollars. This stems from a lack of understanding by those who record and remit sales and use tax as well as from confusion in the way the law is written. Here’s what you need to know.

If the work qualifies as new construction, “initial” installation or sizeable capital improvements, the contractor does not need to charge tax on the work they perform. Exactly what qualifies under these categories can be very confusing and this is what gets some contractors in trouble. A simple example would be: if a contractor installed $100,000 of electrical work on new construction in the state, no sales tax would need to be charged. However, if a contractor installed $100,000 of electrical work on existing construction (i.e., dropped cable in an existing facility), sales tax would need to be charged.

Some of the subtle differences in terminology may trip you up, such as “repair and maintain” vs “repair or maintain”; “initial installation” vs “installation”; and what qualifies as a “capital improvement.” While pages 2-10 of this document from North Carolina provides a list of qualifying activities, in can be a bit overwhelming if your internal financial team isn’t fully versed on NC’s ongoing communications.

The state of North Carolina has issued seven pronouncements since the original law was passed, in attempts to clarify and provide clear guidance. In our experience, the rules are still very muddy and create slippery situations for those involved.

As with so many tax issues, the North Carolina law opens contractors up to lost revenues and penalties but can also provide opportunities if they understand how to properly charge and report sales tax.

Please contact Tim Howe, our Sales and Use Tax practice leader by completing the contact form on this page, or calling him at 404-874-6244.