Jack Schmoll, CPA, Chair of NCACPA’s Tax Committee, shared comments on the upcoming changes from NC’s Department of Revenue. Excerpts from his original post on Connect are contained below. Please visit Connect to read comments from Jack and other tax practitioners on the pending the changes.
North Carolina made dramatic sales tax changes effective March 1, 2016. What you may not know is that there will be more dramatic changes effective January 1, 2017. The changes come from House Bill 1030, which is a wide ranging budget bill that has a dramatic effect on sales tax as well as income tax in North Carolina.
As part of this bill, the Department of Revenue is required to provide written guidance by November 15 of this year with respect to the sales tax changes. Earlier this month, the Department of Revenue held a meeting with key stakeholders in order to gather information about areas of concern for industries and representatives. I was able to attend that meeting and felt it was very productive and will lead to better guidance that we would have otherwise received.
It will be interesting to see the Department of Revenue’s interpretation of these changes, but I did want to share a couple of sales tax highlights in the meantime. Over the course of the next couple months, I plan on sharing more insights regarding this new bill.
With the March 1, 2016 changes, businesses that met the definition of “retail trade” were not allowed to act as real property contractors for sales tax purposes. Instead, they were required to collect sales tax on the charge for real property services. This was often due to the fact that the business generated 50% or more of its revenue from retail sales of products or services. Thankfully, HB 1030 eliminated the definition of “retail trade” as of January 1, 2017 so these types of businesses, again, be treated as real property contractors if they are performing real property contracts.
However, the definition of real property contract was dramatically changed and now requires that the work being performed be a “capital improvement” as defined by the statute.
Capital Improvement – A capital improvement is new construction or a renovation of a building, structure, or fixture on land. Factors that may be considered in determining whether a contract is a real property contract for a capital improvement include the method of attachment for the property installed, the degree of customization of the property installed, and the value added by or useful life of the property installed.
This new definition will cause many projects that previously were nontaxable real property contracts to become taxable effective January 1, 2017. There is quite a bit of gray area when trying to determine if a project is a capital improvement or not, which creates opportunities for taxpayers to quickly create exposure.
Overall, the sales tax section of the law expands the sales tax to previously nontaxable services and increase revenue for the state. At this point I think it is advisable to wait to see the Department of Revenue’s written guidance before advising clients. However, I think it is worth mentioning to them so they are prepared to have that discussion in November. I will address more changes that result from this bill as time goes on.
Originally posted by Jack Schmoll, CPA, on Connect