Are Service Contracts Subject to NC Sales and Use Tax?

  • Posted by Michael Beauchemin on Tue, Jan 14, 2014 @ 01:22 PM

    NC businesses offering service contracts, warranty agreements or maintenance agreements will have to determine if the agreement they offer is now subject to the NC Sales and Use tax. NC.

    Beginning on January 1, 2014, NC rolled out a new sales and use tax.  The tax applies to warranty agreements, service contracts and maintenance agreements that cover tangible personal property. The amount of the NC Sales and Use tax for these contracts is 4.75%.

    What is Tangible Personal Property?

    North Carolina defines tangible personal property as: “Personal property that can be weighed, measured, felt, or touched or is in any other manner perceptible to the senses.” Examples of personal property include; automobiles, heating and air conditioning systems, hot water  heaters, garage doors, computers, televisions, etc. It also includes electricity, water, gas, steam and prewritten software. Custom coded software written specifically for a customer’s unique application is not subject to the Sales and Use tax.

    Who is Liable?

    It is the retailer who is engaged in business in the state that is responsible for collecting sales and use tax on these contracts. Whether the business or entity is legally domesticated in NC or qualified to do business in the state does not matter.

    Conversely, if you are a NC business and sell tangible property and a service contract or warranty agreement outside the sate you do not collect the NC sales and use tax. However, you are required to follow the sales tax requirements for the state, county or city your customer is located in.

    Where is this Sales and Use Tax Applicable?

    As stated above, it applies to any service contract, warrantied repair agreement or maintenance agreement specific to retailers that sell tangible personal property. If you sell a new heating and air conditioning system to a homeowner and sell them a service agreement for repair and maintenance of the system, you are required to collect a 4.75% NC sales and Use tax and any additional local or county taxes for the service repair contract. The same is the case for an extended warranty on an automobile or other agreements tied to the sale of tangible personal property.

    For service agreements billed on a periodic basis such as monthly or quarterly, the sales and use tax is collected at the beginning of each billing period.

    There are Exceptions

    As is the case for all things taxes, there are always exceptions. A key to not over-paying is understanding the exceptions and determining when they apply to your specific situation. Here are a few of the exceptions:

    • Service contracts or maintenance agreements for items exempt from NC Sales and Use tax under Article 5 of Chapter 105 of the N.C. General Statutes. The exception is a motor vehicle and items listed as exempt under N.C. General Statute 105-164.13(32).
    • 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. General Statute 105.164.14A(5)
    • A single repair transaction not included in a service warranty agreement. The retail price of the part is subject to NC and applicable local sales tax, but labor to install the part is not taxed.
    • Service contracts and maintenance agreements sold for tangible personal property already attached to existing property. For example, If you purchase a home and then purchase a service contract to maintain the heating and air conditioning systems, the maintenance agreement is not subject to the 4.75% NC Sales and Use tax. However if the heating and air conditioning company sells or purchases an item classified as tangible personal property or require a taxable service to fulfill the contract, they are required to collect and pay the sales and use tax for the item or taxable service used for the repair.
    • Mill machinery, mill machinery parts or accessories purchased for storage, use or consumption in this state.
    • Logging machinery used by a person engaged in commercial logging to harvest raw forest product for transport to first market.
    • Telephone company central office, switchboard equipment, private branch exchange equipment, and central terminal equipment to a telephone company regularly engaged in providing telecommunications service to subscribers on a commercial basis.
    • Broadcasting equipment used by a radio or television company licensed by the Federal Communications Commission.
    • Broadcasting equipment used by a cable service provider.
    • Tangible personal property purchased by a state agency that meets the statutory requirements of N.C. Gen. Stat. 105-164.13(52)
    • Tangible personal property purchased by the US government.
    • Qualifying farm machinery used by a “farmer” in the planting, cultivating, harvesting, or curing of farm crops or in the production of dairy products, eggs or animals.
    • Laundry and dry-cleaning machinery used by commercial laundry.
    • Boats sold to a commercial fishing operator that meets the statutory requirements of N.C. gen St. 105-164.13(9).
    • Durable medical equipment and mobility enhancing equipment sold on prescription.
    • Prosthetic devices for human use.
    • Custom computer software and other software within the exemption in N.C. Gen Stat 105-164.13(43a) or (43b).
    As is the case with most taxes, there is nothing straight forward or black and white about this tax.  Companies, engaged in selling tangible personal property and service  contracts, maintenance agreements or extended warranties to cover the proeprty should seek the assistance of a CPA knowledgable about North Carolina’s Sales and Use tax law.  
    We would love to hear from you.  Let us know how this tax impacts your business?  

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