North Carolina: Service Contracts for Motor Vehicles and the Highway Use Tax
- Feb 11, 2014 | Gail Cole
The North Carolina Department of Revenue has issued an important notice regarding sales and use tax on service contracts for motor vehicles subject to highway use tax.
According to the DOR, “sales tax is due on the sales price of a service contract sold at retail at the time of the sale of the service contract, notwithstanding the sales price of the service contract ….” Under North Carolina law, service contract is defined 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.”
A service contract sourced in North Carolina and sold at retail “to maintain or repair a motor vehicle” is subject to the following taxes:
- North Carolina state sales tax (4.75%),
- Applicable local sales and use taxes (2% or 2.25%), and
- Transit sales and use tax (0.5%).
This seems straightforward enough but, as often with tax, there’s a little hiccup. In this case, the hiccup regards the highway use tax that comes into play with cars that are leased or rented.
In order to be driven, rental and lease vehicles must be titled. A 3% highway use tax imposed on the “retail value of a motor vehicle for which a certificate of title is issued.”
However, retailers that lease and rent automobiles may “elect not to pay the [highway use tax] … when applying for a certificate of title for a motor vehicle purchased by the retailer for lease or rental.” In this event, the retailer must pay a gross receipts tax on the lease or rental of the vehicle.
The rate of alternate highway use tax (or motor vehicle lease tax) on the short-term rental or lease of a car is 8%. The rate on the long-term rental or lease of a car is 3%. The tax is due to the Department of Revenue.
Retail sales of service contracts “are not considered part of gross receipts derived from the lease or rental of a motor vehicle or a part of the retail value of a motor vehicle. Therefore, any portion of a lease or rental payment that is part of the “sales price of or sales tax on a service contract sold at retail and sourced to [North Carolina] should not be included in the gross receipts subject to the motor vehicle lease tax” (emphasis mine). These charges must be separately stated on monthly bills or invoices.
All clear? If not, check out the important notice issued by the North Carolina Department of Revenue, which will direct you to several other pages of additional information.
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