Are Services Taxable in North Carolina?

North Carolina’s sales tax laws primarily apply to the sale of tangible goods. However, taxing services within the state is more intricate. While most services are not taxable, numerous specific exceptions can lead to unexpected tax obligations. Understanding these distinctions is important for compliance.

General Rule for Services in North Carolina

In North Carolina, most services are not subject to sales tax. This contrasts with tangible personal property, which typically incurs sales tax unless specifically exempt. A service generally involves an action performed for another person, rather than the transfer of a physical item.

The distinction between a service and tangible personal property is central to determining taxability. Tangible personal property refers to physical goods that can be seen, weighed, measured, or touched. Services are intangible activities or performances. This difference establishes that a service is presumed non-taxable unless explicitly defined otherwise by state statute.

Categories of Taxable Services

North Carolina law identifies several specific categories that are subject to sales tax, particularly those that have a direct connection to tangible property or are part of specific industries.

Services that involve creating or manufacturing a product are generally taxable. If a service results in the production of a new tangible item, the transaction may be treated as a sale of that product, thereby subjecting it to sales tax. This includes situations where a service provider uses materials to fabricate a custom item for a client. The sale of certain digital property, such as digital audio works, digital audiovisual works, and digital books, are also subject to sales tax. For example, a photographer selling digital images or a musician selling downloadable tracks may need to collect sales tax on these transactions.

Specific services like laundry and dry cleaning are taxable exceptions. This applies to businesses that provide cleaning, pressing, or dyeing services for clothing and other fabrics. The taxability of these services can sometimes vary by county.

Since March 1, 2016, repair, maintenance, and installation services became broadly taxable in North Carolina. This includes a wide range of activities aimed at keeping tangible personal property in working order, restoring it to proper condition, or setting it into place. For instance, charges for automobile repairs, oil changes, or the installation of new flooring are now generally subject to sales tax.

Admission charges to entertainment events are taxable. This applies to tickets or fees for various activities, including live performances, movies, museums, cultural sites, gardens, exhibits, and guided tours. The charge encompasses not only the base ticket price but also any associated surcharges, convenience fees, or facility charges.

Telecommunications and ancillary services are subject to sales tax. This includes services such as local and long-distance phone calls, data transmission, and other related services that facilitate communication. Prepaid telephone calling services, like those purchased through calling cards or mobile top-ups, are also taxable at the point of sale.

Video programming services, including cable television and direct-to-home satellite services, are subject to sales tax. Satellite Digital Audio Radio Service is also a taxable service.

Service contracts are taxable. A service contract is broadly defined as an agreement to maintain, monitor, inspect, or repair tangible personal property or digital property for a period of time. This includes extended warranty agreements, maintenance agreements, and repair contracts, regardless of whether the covered property becomes permanently affixed to real estate.

Sales Tax Calculation and Business Obligations

Businesses must understand their sales tax obligations, particularly when providing taxable services. Nexus determines whether a business has a sufficient connection to the state to require sales tax collection. Nexus can be established through physical presence, such as having an office, employees, or inventory in the state.

Economic nexus also plays a role, requiring remote sellers to collect sales tax if their gross sales sourced to North Carolina exceed $100,000 in the current or previous calendar year. Once nexus is established, a business is required to register with the North Carolina Department of Revenue to obtain a sales tax permit.

Sales tax rates in North Carolina are a combination of a statewide rate and local rates. The state sales tax rate is 4.75%. Local sales tax rates, imposed by counties and some special districts, can range from 0% to 2.75%. This means the total combined sales tax rate can range from 4.75% to 7.5%, depending on the specific location where the service is provided or received. North Carolina operates under a destination-based sales tax system, meaning the sales tax rate applied is generally based on the location of the buyer or where the service is delivered.

Calculating sales tax for a taxable service involves applying the combined state and local sales tax rate to the sales price of the service. For example, if a taxable service costs $100 and the combined sales tax rate in that jurisdiction is 7%, the sales tax collected would be $7.00. Businesses must accurately determine the correct sales tax rate for each transaction based on the customer’s location.

Specific Industry Scenarios

Real property contractors encounter particular complexities regarding sales tax in North Carolina due to the nature of their work, which often involves both materials and labor. Generally, real property contractors are considered the consumers of the tangible personal property they install or apply to real property as part of a capital improvement project. This means they pay sales or use tax on the materials at the time of purchase, rather than collecting sales tax from their client on the entire contract. Capital improvements typically involve new construction, reconstruction, or remodeling.

However, the situation becomes more intricate when a project involves repair, maintenance, and installation (RMI) services that are not considered capital improvements. Since March 1, 2016, RMI services are generally taxable. This can create “mixed transaction contracts” where a single project includes both non-taxable capital improvement work and taxable RMI services. North Carolina law provides guidance on how to differentiate and tax these components, often involving a “25 percent rule” to determine if the RMI portion is significant enough to be separately taxed.

If the RMI services constitute less than or equal to 25% of the sales price, the entire contract might be treated as a real property contract, meaning the contractor pays tax on materials but does not collect sales tax from the customer on the service. If the RMI services exceed 25%, the contractor must collect sales tax on that allocated portion from the customer. This nuanced approach requires careful record-keeping and understanding of the specific project scope.