Are Consulting Services Taxable in North Carolina?

Sales and use tax in North Carolina applies to the sale of tangible goods and certain services. The North Carolina Department of Revenue (NCDOR) administers these taxes, which are collected by businesses acting as agents for the state. Businesses operating within the state or those with an economic presence are generally required to collect and remit sales tax on taxable transactions. The combined sales tax rates in North Carolina can vary depending on the location of the sale, typically ranging from 4.75% to 7.5%.

General Principles of Sales Tax on Services in North Carolina

North Carolina law generally considers services to be exempt from sales tax, unless a specific statute makes them taxable. However, the state has identified certain services that are explicitly subject to sales and use tax.

The distinction between “tangible personal property” and “services” is important in North Carolina tax law. Tangible personal property is defined as items that can be seen, weighed, measured, felt, or touched, including electricity, water, gas, steam, and prewritten computer software. Services, conversely, are typically activities performed for another. While most services are not taxable, if a service results in the creation or manufacturing of a product, it may become subject to sales tax.

“Bundled transactions” are another area where services might become taxable. A bundled transaction involves the retail sale of two or more distinct products or services for a single, non-itemized price, where at least one item is taxable and one is exempt. If a service is included in a bundle with taxable tangible personal property, the entire bundle may be subject to sales tax unless specific allocation rules are met. For a bundle containing a service, the retailer can allocate the price for each item based on business records, and tax applies only to the allocated price of taxable items.

Identifying Taxable Consulting Activities

The taxability of consulting services in North Carolina depends heavily on the specific nature of the activities performed and what is delivered to the client. While pure advisory services, such as general management consulting or strategic guidance that does not involve the transfer of tangible personal property, are typically not subject to sales tax, exceptions exist. For instance, legal and accounting services are generally not taxed.

Consulting activities that involve the repair, maintenance, or installation of tangible personal property became taxable in North Carolina as of March 1, 2016. Additionally, consulting that leads to the creation or manufacturing of a product may also incur sales tax. For example, if a consultant designs a custom piece of software that is then delivered as a prewritten computer software product, the sale of that software is taxable.

Certain digital services, including software as a service (SaaS), generally are not taxed in North Carolina. However, if consulting services are bundled with the sale of taxable digital property, such as certain digital goods or specified digital products, the entire transaction might be taxable under bundled transaction rules, especially if the services are inseparable from the taxable digital property. North Carolina General Statutes Chapter 105, Article 5, provides the framework for sales and use taxes.

Sales Tax Compliance for Consulting Businesses

If a consulting business determines its services are taxable, the initial step for compliance is to register with the North Carolina Department of Revenue (NCDOR) to obtain a Certificate of Registration. This registration can be completed online through the NCDOR’s business registration portal or by mailing Form NC-BR. There is no fee to apply for this certificate.

Once registered, the business must collect the appropriate sales tax from clients on all taxable transactions. North Carolina is a destination-based sales tax state, meaning the sales tax rate is determined by the buyer’s location.

Sales tax returns must be filed regularly, with the frequency (monthly or quarterly) assigned by the NCDOR based on the business’s tax liability. For most monthly filers, returns and payments are due on or before the 20th day of the month following the reporting period. Quarterly filers typically submit returns and payments by the last day of the month following the quarter. Even if no sales tax was collected during a reporting period, a “zero return” must still be filed to avoid penalties. Returns can generally be filed and payments remitted online through the NCDOR’s portal.