North Carolina and the Taxation of Service Contracts
- Dec 30, 2014 | Gail Cole
The North Carolina Department of Revenue has published a directive announcing the imposition of North Carolina state and local sales and use tax “’to the sales price of a service contract’ sold at retail by a retailer….” The taxation of sales of service contracts takes effect on January 1, 2014.
Service contracts are defined under North Carolina law 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” (N.C. Gen. Stat. § 105-164.3(38b)).
Service contracts billed on monthly or another periodic basis are subject to sales tax for billing periods that begin on or after January 1, 2014.
Taxable services may include:
- Laptop repair contracts;
- In-ground pool warranty contracts;
- HVAC service contracts; and
- Extended warranties for airplanes
Certain service transactions will remain exempt. These include:
- A "single repair transaction between a retailer and a purchaser for tangible personal property that is not completed pursuant to a ‘service contract’ sold to a purchaser….” The example provided is when a retailer sells and installs an alternator for a motor vehicle and the installation labor is separately stated on the invoice.
- 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, provided such contract is sold to a purchaser after an item of tangible personal property is permanently attached to real property.” The example provided is annual service of a garage door.
- Items exempt from sales and use tax under [Article 5 of Chapter 105 of the N.C. General Statutes].
- A transmission, distribution, or other network asset contained on utility-owned land, right-of-way, or easement.
- An item purchased by a professional motorsports racing team for which the team may receive a sales tax refund under N.C. Gen. Stat. § 105.164.14A(5).”
Read the fine print
Any person or business that sells service contracts in North Carolina is advised to read the Department of Revenue directive on service contracts. As always, it’s good to read the fine print.
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