A recent North Carolina Sales Tax law has a direct impact on the budget of just about every property owners association.
On July 1, the state legislature passed House Bill 1030 - Current Operations and Capital Improvements Appropriations Act of 2016, also known as the “budget bill.” In it are a number of noteworthy changes to current sales tax statutes, the most significant of which affect taxation of repair, maintenance and installation (RMI) services. RMI are services performed on tangible personal property. New rules went into effect making certain RMI services taxable.
Depending on various factors, under these current rules, the following services could be taxable: installation of plumbing fixtures and flooring; pool repair and maintenance services; and pond maintenance, among others. The sales tax rate varies depending on the county in which the association is located.
Although HB 1030 was intended to clear up confusion about the original 2015 tax bill, it continues to create a lot of uncertainty for both companies and consumers. Taxability depends principally on the nature of the company providing the service. The result is RMI services are taxable when provided by some companies, but those same services may not be taxable when provided by a different company.
For example, in the current law, a significant consideration is whether or not a company is in “retail trade,” a conclusion reached by either meeting certain industry classifications or analyzing the source of the company’s revenues. A business classified as a retail trade is required to tax all RMI services unless one of a few narrow exceptions is met. This particular provision resulted in many services performed as part of real property contracts being taxable.
HB 1030 removes all references to “retail trade,” making the determination for many taxpayers much simpler. However, effective Jan. 1, 2017, many other RMI services will become taxable under HB 1030. The default provision is that all RMI services will be taxable unless specific exceptions are met.
One notable exception is for RMI services performed on tangible personal property that becomes part of real property and qualifies as a “capital improvement.” For example, a hot water heater and an HVAC unit are tangible personal property that become affixed to real property. If either of these is installed as part of a new construction project, reconstruction or remodeling project (these terms are specifically defined), then the installation charge would not be taxable.
However, if the installation is done merely to replace an existing unit, the installer will be obligated to impose sales tax on the labor charge. Interestingly, the installation company might not readily know whether or not the work is part of a capital improvement project, so they may not know to tax the installation charge.
One good thing with regard to property owner associations is a number of typical property owner expenses are exempt in HB 1030, including: landscaping; snow removal; pest control services; and services on roads, driveways, parking lots and sidewalks.
Many other services, however, are at risk of becoming taxable on Jan. 1, 2017. While much clarity is needed, newly taxable services could include the following: minor repair and maintenance services; rekeying doors; and swimming pool cleaning.
It may be possible to reduce the N.C. Sales Tax an association pays by separating certain service contracts. For example, pool maintenance and repair – a taxable service - can be separated from cleaning the pool restroom, which is a non-taxable service. Check with your accountant to see other changes that may reduce the sales tax owed by your association.
In addition, many of the RMI services that are taxable under the currently enacted rules will continue to be taxed.
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