North Carolina extends sales tax to certain service contracts

Repair or maintenance of tangible personal property subject to sales tax

TAX ALERT  | 

On July 23, 2013, North Carolina Governor Pat McCrory signed into law House Bill 998, the Tax Simplification and Reduction Act (the Act). This legislation made important changes to the North Carolina tax code and included reforms to the state’s individual income tax, corporate income tax, and sales and use tax.

Among numerous significant changes, the Act extends the application of the North Carolina sales tax to sales of service contracts beginning on Jan. 1, 2014 (N.C. Gen. Stat. section 105-164.4(a)(11)). A service contract is defined as a warranty agreement, maintenance agreement, repair contract, or similar agreement or contract under which a seller agrees to maintain or repair tangible personal property (N.C. Gen. Stat. section 105-164.3(38b)). Tax will be applied to the sales price of the service contract.

Sales of service contracts related to the maintenance or repair of tangible personal property will continue to be exempt from sales tax in the following circumstances:

  • The item of tangible personal property to which the service contract relates is exempt from sales tax. However, this exemption does not apply to motor vehicles. While the sale of a motor vehicle is subject to highway use tax in lieu of the general state sales tax, the general state sales tax will apply to the sales price of a service contract related to a motor vehicle. Sales of motor vehicles will continue to be subject to the North Carolina highway use tax.
  • The item of tangible personal property to which the service contract relates is a transmission, distribution, or other network asset contained on a utility-owned tract of land, right-of-way, or easement.
  • The item of tangible personal property to which the service contract relates is an item purchased by a professional motorsports racing team for which the team may receive a sales tax refund under N.C. Gen. Stat. section 105-164.14A(5).

Regardless of these exemptions, the Act will operate to extend the North Carolina sales tax to a number of service contracts that were previously not subject to tax. Businesses providing warranty agreements, maintenance agreements, repair contracts or similar agreements should carefully consider whether their contracts will be affected by these changes.

This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services.  This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein.  McGladrey LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.

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