PHCCNC: Sales tax update: More repair and maintenance services to be taxed; but not capital improvements

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The Plumbing Heating Cooling Contractors of North Carolina (PHCCNC) has posted an update on legislation designed to overcome some of the inconsistencies which resulted when the North Carolina legislature decided to impose sales tax on certain repair, maintenance and installation services.

The legislation has a mouthful title: “HB-1030: An Act to Modify the Current Operations and Capital Improvements Appropriations Act of 2015 and to Make Other Changes in the Budget Operations of the State.”

Most of the new provisions will take effect on Jan. 1, 2017.

PHCCNC says:

These provisions will be important to individuals and companies that provide repair, maintenance and
installation services to real property. For example, as opposed to current sales and use tax law, these new provisions will treat similar transactions the same regardless of who performs the service. This bill removes the distinction and provides that all businesses that provide taxable repair, maintenance and installation services will be treated the same. As a practical matter, this will have the effect of taxing many more repair and maintenance services to real property, since most of the businesses that perform these services are contractors under current law.

PHCCNC says the new sales and use tax provisions in the 2016 budget bill will also:

Exclude capital improvements – Installations into real property, and some significant repairs, would not be taxable if the service is a “capital improvement”.  Factors to consider in determining whether a contract is for the performance of a capital improvement to real property are:

1. The method of attachment for the property installed.
2. The degree of customization of the property installed.
3. The value added by or the useful life of the property installed.

The bill specifically identifies the following as capital improvements, and the installation and construction of these items would not be subject to sales tax:

  • New construction and enlargement of an existing structure.
  • Removal of items from real property, such as asbestos and construction material.
  • Performance for work that requires a permit under the State Building Code.
  • Installation of equipment that is attached to real property so that the removal of the item would case physical, function or economic damage to the property;
  • Installation of roofing, septic tank, plumbing, electrical, commercial, refrigeration, irrigation and sprinkler systems.
  • Installation of a HVAC unit or system.
  • Installation of roads, driveways, parking lots and sidewalks.
  • Landscaping services.

Exempt certain RMI Services from Tax – The following services, which otherwise fall within the definition of “repair, maintenance, and installation services (RMI),” would be exempt from tax:

  • A fee or charge for an inspection required by law. For example, a fee imposed to have a motor vehicle inspected.
  • Service performed by a related member. A person is a related member if at least 50 percent of its value is owned by the entity for which it is providing the RMI service; in this instance, the service is more analogous to a service provided by an employee than a retailer.
  • Service performed to resolve an issue that was part of a capital improvement if the services are performed within six months of the completion of the improvement or within 12 months of a new structure being occupied for the first time. This exemption would include repair services a contractor may have to provide for “punch list” items required of a purchaser of a new structure.
  • RMI service for roads, parking lots and sidewalks. This exemption would treat the repair and maintenance or these items the same as the construction of them. These items are most often state or county-owned in nature and commercial property.
  • Removal of items from real property that may be provided on an as-needed basis rather than under a real property contract. Examples include garbage, grease and debris.
  • Home inspections in preparation for sale of property.

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