State Politics

Legislators seek to clear up sales tax confusion with $22.4 million change

Bernardino Pina looks over the progress of a remodeling job at a Fayetteville apartment complex in 2014. Remodeling companies struggled to figure out whether they had to charge sales tax after the state expanded the tax in March.
Bernardino Pina looks over the progress of a remodeling job at a Fayetteville apartment complex in 2014. Remodeling companies struggled to figure out whether they had to charge sales tax after the state expanded the tax in March.

Aiming to clear up confusion over North Carolina’s sales tax on repair, maintenance and installation services, the legislature has tweaked what services are subject to the tax in a way that will generate an additional $22.4 million for state government in the next year.

The state budget signed by Gov. Pat McCrory this week makes it clear that major installations on homes and buildings – such as flooring, plumbing, and heating and air conditioning – won’t be subject to tax. Minor repairs and maintenance will be taxed.

The changes taking effect in January also exempt clothing alterations, cleaning services and landscaping.

The Republican-controlled legislature has expanded the sales tax to more services as part of a move away from income taxes as a primary source of revenue. But lawmakers said the previous round of changes that took effect in March resulted in an unlevel playing field, because whether a service is taxed largely depends on whether the firm performing the service is also selling materials.

That meant a service – unclogging a toilet, for example – is subject to sales tax with a company whose business is mostly sales but exempt if a customer hires someone who only does the service. Customers could avoid sales tax if they hired someone who isn’t a retailer. The goal was to help businesses that hadn’t previously collected sales taxes, but some complained of an unfair system.

“There were numerous cases of taxpayers being uncertain of whether they had to collect sales tax or not,” said Rep. John Szoka, a Fayetteville Republican.

Tim Minton of the North Carolina Home Builders Association said the construction industry struggled to figure out the new tax.

“I would probably talk for two hours at a meeting, that’s how confusing it was,” Minton said, noting that firms had difficulty quoting prices because they weren’t sure if their subcontractors were subject to the new sales tax.

The Senate’s proposed clarifications would have generated $80 million in new revenue and caused 30,000 small businesses to start collecting sales taxes for the first time, but lawmakers settled on a smaller sales-tax expansion in the final budget deal.

The Senate was looking to expand the sales tax to a few additional services such as pest control, said House Finance Chairman Jason Saine, a Lincolnton Republican.

“That’s kind of a public health issue for one,” he said. “Why make it more expensive than it already has to be?”

Saine said the House budget negotiators opposed taxing more services. “The House took a much more conservative approach,” he said. “We didn’t have an appetite for expansion this year.”

The final budget agreement sought to avoid taxing work that adds property value to real estate, since services like kitchen remodeling typically adds to the property taxes paid on a home. But lawmakers decided to treat minor home repairs similar to car repairs and maintenance, which have been taxed since March.

Andy Ellen of the N.C. Retail Merchants Association praised legislators’ new tax plan. “Businesses always want certainty, and I think they’ve given that,” he said. “They removed any inequity so that if a service is taxed, no matter who does it, it’s taxed.”

Ellen says retailers wanted to make sure the cost of major building upgrades, such as remodeling grocery stores, wouldn’t increase. “We wanted to make sure that it didn’t disincentivize capital investments,” he said.

Republicans noted that the sales tax changes would be offset by an increase in the standard deduction for income taxes. The amount on which taxpayers owe no taxes if they don’t itemize returns would increase from $15,500 to $17,500 over two years for a married couple, resulting in a tax cut of up to roughly $100.

What’s taxed under this year’s budget?

Exempted from sales tax: Towing, vehicle service contracts, home cleaning and janitorial services, pest control, landscaping, clothing alterations, furniture upholstery, monogramming, paving, self-service car washes, painting, wallpapering, and installation of plumbing, heating and cooling equipment, roofing, flooring and septic tanks.

Subject to sales tax: Car washes performed by people, all repairs and maintenance services on what’s termed “tangible personal property” – including vehicles, plumbing, heating and air, and appliances unless the job involves getting a building permit.