North Carolina to Tax Service Contracts, October 2014
- Sep 30, 2014 | Gail Cole
North Carolina began imposing state and local sales and use taxes “to the sales price of a service contract sourced to” North Carolina on January 1, 2014. Effective October 1, 2014, an amendment to N.C. Gen. Stat. § 105-164.4(a)(11) makes adjustments to the tax.
North Carolina imposes a “privilege tax at the 4.75% general State and applicable local and transit rates of sales and use tax on a retailer to the sales price of or the gross receipts derived from a service contract sold at retail.” Definitions are amended effective October 2014. Service contract is defined as a contract “where the obligor under the contract agrees to maintain or repair tangible personal property or a motor vehicle.” Obligor is defined as a person who “is legally, or contractually, obliged to provide the services for the service contract to the purchaser.” Facilitator is “a person who contracts with the obligor of the service contract to market the service contract and accepts payment from the purchaser for the service contract.”
Who is liable?
According to an Important Notice published by the North Carolina Department of Revenue, the retailer is liable for the sales and use tax on the retail sale of or the gross receipts derived from a service contractor. How the service contract is sold impacts whether the obligor or the facilitator is considered the retailer. Effective October 1:
- “When a service contract is sold at retail to a purchaser by the obligor under the contract, the obligor is the retailer.
- When a service contract is sold at retail to a purchaser by a facilitator on behalf of the obligor under the contract, the facilitator is the retailer unless the provisions of (3) below apply.
- When a service contract is sold at retail to a purchaser by a facilitator on behalf of the obligor under the contract and there is an agreement between the facilitator and the obligor that states the obligor will be liable for the payment of the sales and use tax, the obligor is the retailer. The facilitator must send the retailer the sales and use tax due on the sales price of or gross receipts derived from the service contract no later than 10 days after the end of each calendar month. A facilitator that does not send the retailer the sales and use tax due on the sales price of or gross receipts derived from a service contract is liable for the amount of sales and use tax the facilitator fails to send. A facilitator is not liable for sales and use tax sent to a retailer but not remitted by the retailer to the Secretary. Sales and use tax payments received by a retailer from a facilitator are held in trust by the retailer for remittance to the Secretary. A retailer that receives a sales and use tax payment from a facilitator must remit the amount received to the Secretary. A retailer is not liable for sales and use tax due but not received from a facilitator. The requirements imposed by this subdivision on a retailer and a facilitator are considered terms of the agreement between the retailer and the facilitator.”
What is exempt?
Certain service contracts are specifically exempt from sales and use tax, particularly those related to the “transmission, distribution, or other network asset contained on utility-owned land, right-of-way, or easement.” Effective October 1, 2014, an “item used to maintain or repair tangible personal property or a motor vehicle pursuant to a service contract if the purchaser of the contract is not charged for the item” is specifically exempt:
“This exemption does not apply to an item used to maintain or repair tangible personal property pursuant to a service contract exempt from tax under G.S. 105-164.4I(b). For purposes of this exemption, the term "item" does not include a tool, equipment, supply, or similar tangible personal property used to complete the maintenance or repair and that is not deemed to be a component or repair part of the tangible personal property or motor vehicle for which a service contract is sold to a purchaser."
Additional information, including sample situations, exceptions effective October 1, basis of reporting, and how to refund tax on rescinded sales or cancellation of service, is available in the Importance Notice.
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