The Plumbing Heating Cooling Contractors of North Carolina (PHCC-NC) has received some additional information about the new sales tax on services, and its implications for contractors, from Eric Wayne, director of the state government’s sales and use tax division.
“Hopefully within them you can find relevant guidance for your business going forward,” PHCC–NC says in an email to members.
“Even though we are two days into the implementation of the recent changes to the Sales Tax rules as they relate to our industries, there seems to still be much confusion as to how they should be applied,” PHCC-NC reported. “As your association, we have been seeking simple, straight-forward answers to the questions we have received. Since we’re not tax attorneys or accountants, we obviously cannot advise you specifically how to apply the rules to your transactions. We can however, pass along what we’ve received from the Department of Revenue as guidance.”
Here are the questions and answers reported by PHCC-NC:
Q: Will we be required to charge (and remit) sales tax on any and every billing?
A: I do not believe there is enough information presented to property respond to this question. However, a person who is not a “retailer” or a “retailer-contractor” on or after March 1, 2016, the person is not liable for sales and use tax on the gross receipts derived from the sale of repair, maintenance, and installation services.”
Q: What about contracts and work that is already bid?
A: Regarding contracts and work that is already bid, please see the important notice issued on Tuesday, February 23, 2016 on the Department’s website that addresses application of the tax laws effective March 1, 2016 for purchases on or after such date to fulfill a lump-sum or unit-price contract that was entered into, or awarded pursuant to a bid submitted prior to March 1, 2016. http://www.dornc.com/taxes/sales/impnotice022316_e589j.pdf
Q: If this is just for “service”, what defines service as opposed to a small contract job? Sometimes half of our work is small jobs (1-8 hours + material) to our repeat customers.
A: This question is not entirely clear as I am not entirely sure of the business operations of the person asking the question. However, see the definition of repair, maintenance, and installation services below:
N.C. Gen. Stat. § 105-164.3(33g) defines “repair, maintenance, and installation services.” The term includes the following activities:
a. To keep or attempt to keep tangible personal property or a motor vehicle in working order to avoid breakdown and prevent repairs.
b. To calibrate, restore, or attempt to calibrate or restore tangible personal property or a motor vehicle to proper working order or good condition. This activity may include replacing or putting together what is torn or broken.
c. To troubleshoot, identify, or attempt to identify the source of a problem for the purpose of determining what is needed to restore tangible personal property or a motor vehicle to proper working order or good condition.
d. To install or apply tangible personal property except tangible personal property installed or applied by a real property contractor pursuant to a real property contract.
The person should be reminded that “a real property contract” as of March 1, 2016, is “[a] person that contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real property and to furnish tangible personal property to be installed or applied to real property in connection with the contract and the labor to install or apply the tangible personal property that becomes part of real property. The term includes a general contractor, a subcontractor, or a builder for purposes of G.S. 105164.4H. The term does not include a person engaged in retail trade.”
A person that is a “retailer” that makes a charge for installation charges as part of the sales price of real property is liable for tax on the full amount of the charges. Likewise, a person that is a “retailer” who may only install tangible personal property owned by others must charge tax on the installation services. Again, I don’t think there is sufficient details to provide specific guidance.
Q: Does this include labor?
A: A person that is a “retailer” that makes a charge for installation charges as part of the sales price of real property is liable for tax on the full amount of the charges. Likewise, a person that is a “retailer” who may only install tangible personal property owned by others must charge tax on the installation services. Again, I don’t think there are sufficient details to provide specific guidance.
Q: Does the amount have to be shown broken out?
A: I am unclear as to what amount is being asked if it has to be broken out. However, a person that is solely a real property contractor, typically issues a lump-sum invoice. If by chance the person is a retailer-contractor, it will depend. If the person is in “retail trade,” labor is taxable no matter if separately stated or not.
Q: How will the taxes be remitted?
A: If a person is a retailer, the retailer should collect and remit the taxes to the Department of Revenue on the retail sales price of tangible personal property (including installation) or on the gross receipts derived from repair, maintenance, and installation services. A person who needs to register to collect sales and use tax may do so at the following location on the Department’s website:
Q: Will the general public be informed of the new tax charges on their invoices by the NC Dept of Revenue prior to the effective date?
A: The Department has issue a number of various publications regarding the upcoming sales and use taxes March 1, 2016. Much of the information has been provided to all persons with active sales and use tax accounts, some has been shared directly with various professional and industry groups, and the Department has been contacted by a number of reporters with various questions.
Q: Will the Sales Tax submittal forms be redone to reflect the current changes?
A: There is no need to alter the sales and use tax form for changes effective March 1, 2016. Any gross receipts and corresponding sales tax for items that are subject to tax on March 1, 2016, shall be reported along with other Sales and Receipts at the State, Local, and Transit lines of the returns, as applicable. http://www.dornc.com/downloads/fillin/e500_10-14_webfill.pdf
Q: Do we show the Sales Tax charged on the labor as a separate invoice line item?
A: If the person is a retailer and provided the labor is part of the sales price of an installed item or if the person is a retailer and selling repair, maintenance, and installation services that does not meet the exception from retailer, it does not matter if the charge for the labor is separately stated or not. If by chance there is some type of labor that is not subject to tax, it is best to separately state such and properly identified the charge on the invoice or other documentation given to the purchaser at the time of the sale. However, again, I think more information would be helpful in responding to this inquiry.
Q: How will we account for the sales tax paid on materials and then for labor when reporting sales tax expenses for income tax?
A: You should discuss with question with your income tax preparer. It will depend on how your accounting/point of sale system is set up for income tax purposes. However, a person engaged in the business of selling materials and labor and as a retailer, should not pay sales or use tax at the time of purchase to its vendors but rather should issue a certificate of exemption indicating the items are for resale. Again, more information would be helpful and the person likely should consult with their accountant
Q: How soon do you expect a clarification on who, and under what circumstances, we will be required to charge sales tax on labor?
A: The Department has issued all of the written guidance necessary for a person to make an informed decision as to any sales and use tax responsibilities relative to the changes effective March 1, 2016.
Q: How should this apply to Propane or Heating Oil retail marketers that also do HVAC retail repairs?
A: If the receipts the majority of the revenue (greater than 50%) from selling propane gas at retail, such person is in “retail trade” and must charge sales tax on the gross amount of the HVAC retail repairs in addition to the retail sales or propane gas, tanks, etc. Like with the propane gas, the person would want to purchase any tangible personal property or repair, maintenance, and installation services without payment of tax from its vendors by issuance of a certificate of exemption or providing the required data elements if the purchase is a remote purchase.
Q: I could not understand if we are supposed to charge sales tax for a service call.
A: It will depend on the purpose for a service call as to whether such is part of the sales price of tangible personal property subject to sales and use tax or if such is part of the gross receipts derived from the retail sale of repair, maintenance, and installations services. If the business is a retailer, any charge to troubleshoot, diagnose, etc. is subject to sales and use tax.
Q: If we are, do we charge tax on both the part and the labor?
A: If the person is a “retailer,” tax should be charged on the total sales price of the item sold (parts and labor).
Q: How do the sales tax revisions differentiate between personal property repair, and our work, which is maintaining real property?
A: The definition of “repair, maintenance, and installation services,” is applicable to tangible personal property or a motor vehicle, unless the person is a retailer in “retail trade,” and therefore, liable for sales tax on repair, maintenance, and installation services that include “to install or apply tangible personal property” that becomes part of or affixed to real property.
Q: Will we need to charge sales tax on an extended labor only warranty we sell at the time an HVAC system is installed?
A: If the person is a “retailer,” the sales price of the parts and any installation labor is subject to tax. A person that solely operates as a “real property contractor” as previously defined above, should not charge sales tax to customers. The term “retailer” as defined effective March 1, 2016 provides the following two exceptions and a person that meets either exception is not a retailer liable for collecting sales and use tax on transactions with customers.
1. A person that solely operates as a real property contractor.
2. A person whose only business activity is providing repair, maintenance, and installation services where the person’s activities do not otherwise meet the definition of a retail trade.
Q: Will we need to charge sales tax on an extended labor only warranty we sell after an HVAC system is installed?
A: If the transaction meets the definition of “service contract,” then the sales price of the contract to maintain or repair and HVAC system is subject to tax on or after March 1, 2016. The definition of “service contract” effective March 1, 2016 is “[a]
contract where the obligor under the contract agrees to maintain or repair tangible personal property, regardless of whether the property becomes a part of or is affixed to real property, or a motor vehicle. Examples of a service contract include a warranty agreement other than a manufacturer’s warranty or dealer’s warranty provided at no charge to the purchaser, an extended warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract.”
Q: Will we need to charge sales tax on a Maintenance Agreement we sell at the time an HVAC system is installed?
A: Yes, for contracts sold on or after March 1, 2016, provided the maintenance agreement meets the definition of service contract as amended and stated immediately above in response to the last bullet item.
Q: Will we need to charge sales tax on a Maintenance Agreement we sell after an HVAC system is installed?
A: Yes, for contracts sold on or after March 1, 2016, provided the maintenance agreement meets the definition of service contract as amended and stated above.
Q: The statutes say that labor purchased for resale is exempt from sales and use tax. What constitutes resale from a labor standpoint? Does that mean that services we provide a first or second-tiered contractor doing work for an end user is essentially reselling that labor? Does it mean that even if a contractor is NOT tax exempt for the goods and materials they purchase from us, that the labor would be because it is part of the work being sold to the end user?
A: A person that is a retailer that elects to purchase labor from another party for resale should not pay tax on the labor charge. For instance, a person that is a retailer may elect to use a third party to install doors and windows. The retailer should not pay tax on the purchase price of the labor (assuming the 3rd party is wholesale or retailer) but the retailer should charge sales tax on the installed product to the consumer. This is not speaking to a general contractor who solely operates as a real property contractor that subs out parts of a real property contract to a subcontractor that only provides labor relative to the real property contract.
Q: Along the same lines, if we are asked to do repair work for a tax exempt organization, such as a hospital and the labor is not being resold, is the labor to be considered non-taxable and exempt as well just like any goods or materials purchased from us?
A: Nonprofit organizations generally must pay the applicable sales tax to a retailer. Certain nonprofit entities are allowed a semi annual refund of taxes paid provided the entity files a refund claim with the Department. I believe more information is necessary to properly respond to this question.