Sales tax on invoices in North Carolina

North Carolina sorts work on real property into two kinds. A real property contract for a capital improvement carries no sales tax for your customer, while repair, maintenance and installation (RMI) services are taxable, and services to real property are generally treated as RMI unless you substantiate otherwise.

Certificate of Registration and who owes the tax

North Carolina’s sales and use tax is a privilege tax on retailers engaged in business in the State, charged on their net taxable sales or gross receipts. If you sell tangible personal property at retail, or sell and provide taxable services, you must register with the North Carolina Department of Revenue (NCDOR), online or by mail, for a Certificate of Registration.

Capital improvements: no tax on a real property contract

A real property contract is a contract to perform a capital improvement to real property, and North Carolina doesn’t tax the gross receipts from one. The general contractor, subcontractor or builder performing it is a real property contractor: the consumer of the materials it buys and installs, and the one who pays tax on them.

NCDOR’s list of capital improvements includes:

• New construction, reconstruction or remodeling.
• Work that requires a permit under the State Building Code, other than repairing or replacing electrical components, gas logs, a water heater and similar individual items outside new construction, reconstruction or remodeling.
• Painting or wallpapering, unless it’s incidental to an RMI service.
• Replacing or installing a roof, siding, a septic tank system, or a plumbing, electrical, irrigation, sprinkler or commercial refrigeration system, though not repairing, replacing or installing electrical or plumbing components, water heaters, gutters and similar individual items outside new construction, reconstruction or remodeling.
• Replacing or installing a heating or air conditioning unit or an HVAC system, though not gas logs, water heaters, pool heaters and similar individual items outside new construction, reconstruction or remodeling.
• Replacing or installing roads, driveways, parking lots, patios, decks and sidewalks.
• Landscaping, and a permanently affixed addition or alteration that isn’t an RMI activity.

Remodeling takes several services connected to one another in time and scope. A single RMI service isn’t remodeling, and neither is a job whose true purpose is RMI with an incidental second service, such as repairing sheetrock and painting it. Replacing several like-kind items counts as one service. In NCDOR’s examples, a kitchen update made up of several services that would each be taxable RMI on their own is remodeling, while replacing a prefabricated fiberglass shower enclosure is taxable RMI.

Form E-589CI or records: substantiate the job

A North Carolina job is a real property contract only if you substantiate it, by receiving Form E-589CI, Affidavit of Capital Improvement, or with records that establish it; otherwise it’s taxed as RMI. NCDOR says the form must generally be issued and kept on file for a real property contract. A job explicitly listed as a capital improvement, such as landscaping or a new HVAC system, can instead be established with unambiguous records. Misusing Form E-589CI carries a $250 penalty.

If a contractor hires you as its subcontractor and gives you Form E-589CI, don’t charge that contractor sales tax. Pay the tax on the taxable items you buy for the job instead, to your supplier or as use tax to NCDOR.

Mixed contracts and the 25% rule

A mixed transaction contract combines a capital improvement with RMI services to real property that aren’t related to it. Compare the allocated price of the taxable RMI services with the contract price:

• 25% or less: the RMI services, and the items used for them, are taxed as part of the real property contract, so the job carries no tax to your customer.
• More than 25%: sales tax applies to the RMI portion of the contract.

For example, with illustrative numbers: on a $20,000 contract, $4,000 of unrelated RMI is 20%, so the whole job is a real property contract, while $6,000 of RMI is 30%, so tax applies to that $6,000. A mixed contract needs the same substantiation, or it’s taxed as RMI.

Repair, maintenance and installation: taxable

RMI services to real property are taxed at the state rate on this page plus the applicable local and transit rates, unless a statute exempts them, and the tax generally covers the items that become part of your customer’s property. RMI includes keeping property in working order, for example by cleaning, washing or polishing it, and installing items that may replace a similar existing item: floor refinishing, carpet, flooring, windows, doors, cabinets and countertops. Replacing one or more like-kind items, such as windows, is RMI unless the installation is a capital improvement you substantiate, and installation charges are taxable even when you state them separately.

NCDOR’s examples of taxable RMI by trade, as opposed to replacing or installing the whole unit, system or roof:

• HVAC: repairing a heating or air conditioning unit that isn’t working properly.
• Plumbing: unclogging a drain, finding and repairing a leak in a pipe, and repairing or replacing a water heater, toilet or sink.
• Electrical: repairing a light switch or receptacle that isn’t working properly, and repairing or replacing a single light fixture.
• Roofing: a roofing company finding and repairing a roof leak.

Landscaping and mowing: capital improvements

North Carolina’s definitions list landscaping as a capital improvement and describe it as a service that modifies the living elements of an area of land, such as installing trees, shrubs or flowers, tree trimming, mowing, and applying seed, mulch, pine straw or fertilizer. Services to plants in pots or in buildings aren’t landscaping. Substantiated with Form E-589CI or unambiguous records, a landscaping or mowing job is a real property contract: no tax on your charge, and you pay tax on what you buy.

Cleaning and power washing: exempt RMI

Cleaning real property is an exempt RMI service. NCDOR’s examples include custodial services, window washing, mold remediation, carpet cleaning, disinfecting, removing debris from gutters, removing dust from ductwork, and power washing. The exemption doesn’t cover cleaning that’s part of a taxable accommodation rental, or cleaning a pool, fish tank or similar aquatic feature. A service on roads, driveways, parking lots and sidewalks is exempt too. You generally pay tax on the items you use for an exempt service.

Tax line: stated separately, or none at all

When you charge North Carolina sales tax, state it and charge it separately on your invoice, unless you display a statement that your price includes the tax. On a real property contract, you must not separately state any amount for tax on the invoice or other documents you give your customer; any tax stated there is an erroneous collection that must be remitted to the Secretary of Revenue. On a mixed contract over the 25% line, tax applies only to the RMI portion.

County and transit tax: sourced to the job

Counties add local rates to the state rate on this page, and some add a 0.50% transit rate; NCDOR’s Current Sales and Use Tax Rates page lists each county’s total. RMI services are generally sourced to where your customer can first use the property you worked on, which for real property is generally its location. Materials for a real property contract are generally sourced where you take possession of them, and you may owe additional use tax if the job’s county has a higher rate than the county where you took them.

Watch-outs: one trade, two treatments

• The job decides, not the trade. A substantiated roof replacement, HVAC unit or system replacement, or remodel carries no tax line, while a repair by the same business, or its replacement of an individual item such as a water heater or a single light fixture, is taxable RMI. NCDOR’s Services to Real Property Taxability Chart gives the general treatment of common services.
• Call-backs after a capital improvement. Fixing an issue that was part of a real property contract stays part of the capital improvement if you do it within six months of completing the contract, or, for new construction, within 12 months of the building’s first occupancy.