NC sales tax vs capital improvement
As of 1/1/17 the state of NC sales tax vs capital improvement has become a little muddier. Trade laborers such as electricians, plumbers, handymen, etc; will now have to charge sales tax on the labor they bill to their customers. This has put an unnecessary burden on these trades as there is now an additional item to track in their accounting system. However, there is one area in the trade craft where they don't have to charge sales tax to the customer. If you are performing work related to a capital improvement on the property then you are not requested to charge sales tax on the labor. I have outlined several general rules that you can take into account.
**I recommend talking with you accountant or bookkeeper regarding the treatment of sales tax within your business.***
NC sales tax vs capital improvement
So you have been hired by your client to perform a capital improvement on their property. I have been implementing a system with my clients for them to provide their clients a Form E589CI , which is an affidavit of capital improvement. By having their clients fill this form out before the major project begins, my clients do not have to charge sales tax on the labor portion of income. Since a majority of them markup the materials, they are still required to charge sales tax in the County in which the project resides.
Determine if you are required to charge sales tax
As a business owner in trade craft you will need to evaluate whether you are required to charge sales tax on your labor. If you are doing any type of repair, maintenance or installation and service contracts such as repairing an outlet, unclogging a drain, installing a light fixture, rekeying locks; then you are required to charge sales tax on your labor. Below is a short list from the NCDOR on what they consider taxable labor.
HVAC repair for an air conditioning or heating unit that is not working properly.
Rekey locks for real property by a locksmith.
Repair of a water pump motor
Repair to correct a jammed garage door.
Electrical repair due to a light switch or receptacle not working properly.
Plumbing services to unclog a drain.
Plumbing services to identify and repair a leak in a pipe.
Services by a roofing company to identify and repair a roof leak.
Replace damaged exterior bricks.
Replace or repair of a storm door or garage door.
Repair or replace countertops.
Replace or reface kitchen cabinet doors.
Repair or replace a water heater.
Repair of a liner for a swimming pool.
Repair or replace a single light fixture.
Carpet or linoleum install for a single room.
Repair or replace single plumbing fixture (i.e. toilet or sink).
Replacement of plate glass window.
***This list of examples will grow as the NCDOR updates the regulations.***
If your work involves a capital improvement or major remodel to a property then tax on the labor most likely will not need to be charged. A good guide to follow would be list here.
I have to charge sales tax what do I do next?
So you are required to charge sales tax, what do you do next? I recommend talking with your bookkeeper or accountant as they should be able to help establish everything you need to stay compliant.
see also: Bookkeeper Qualities you should look for
step 1: Register with the NCDOR
The easiest thing to do would be to call the NCDOR directly and speak with an agent. They will be able to guide you through the process over the phone and instruct you on what needs to be filled out.
Step 2: Set up sales tax rates in your accounting system
Accounting software makes accounting for sales tax so much easier. I recommend finding a bookkeeper or accountant to set this up if you don't have one already. Otherwise there are plenty of articles on the internet to walk you through setting this up. Since you do business in NC you will have to charge the appropriate sales tax in the County you are doing work in. Most business owners work in one maybe two counties. Regardless, use the NCDOR sales tax table, to figure out the sales tax rates you need to charge. Once you set up the county rates you work in, it is just a matter of selecting which county you are invoicing in and the appropriate tax will be charged.
Step 3: Estimates and Invoicing clients
Now that you have your accounting software set up to charge the appropriate sales tax it is recommend start to estimate and invoice your customers using the proper county rate. A common practice when estimating the job is to add a note to the estimate that the "Total balance due is subject to {Insert County} tax rate". It is my experience that estimates change often and by adding that note, customers are informed that tax will be charged on the total balance due.
Remember if you are subject to this balance due then both your materials and labor are taxable. Later in this post I will go over what to do about paying for materials sales tax free.
Step 4: Collect sales tax from customer and transfer to a separate bank account
This is a huge step that helps my clients out. If you do not have someone that is able to provide you cash flow reports weekly, I highly recommend setting up a separate bank account to deposit all of your sales tax into. Tradesman are notorious for spending all they have whether it is for materials or personal expenses.
The system of collecting sales tax is simply collecting money from a customer and paying that sales tax to the Government. There is no additional tax expense to the business as you are just collecting it, saving it until the end of the month and paying it out.
This is one game you do not want to play. If you can't pay the sales tax then you literally stole money from the Government and they WILL be knocking on your door soon to get it back.
By transferring the sales tax you collected into a separate account, that money is safe from spending and easy to pay when the time comes.
Step 4: Pay sales tax to North Carolina
Depending on how North Carolina set you up, you may pay sales tax each month or each quarter. Regardless of when you pay it, you will either fill out the coupon they gave you or fill it out online by the 15th of the following month. DO NOT miss this deadline as you will have to pay penalties and interest.
You can run a sales tax report in your accounting software to break out what Counties you are sending sales tax payments to.
Do I have to pay sales tax on materials that I am taxing my customer on?
The Government doesn't want to cut into your profit. They allow business owners that are charging sales tax on repairs, maintenance and installation services, not to pay sales tax on the initial material purchases. Also, lets not let them collect sales tax on a material two times. If you are one of these business owners then you can fill out the E595E Sales Tax Exemption Form and hand it to your vendor. In doing so, your vendor will not charge you sales tax on the material you are purchasing.
Remodels? Do I charge tax
This a confusing term when it comes to charging sales tax in NC. It boils down to one main thing.
During the remodel are you altering major structural components in the room such as wiring or plumbing? If so, then the remodel is a capital improvement and not subject to sales tax.
During the remodel are you altering fixtures, colors, features (granite counter tops)? If so, then the remodel is subject to sales tax as it is not considered a capital improvement.
I have service contracts with my clients
Under the new sales tax regulation, you are required to start charging sales tax on service contracts you have with your clients. Service contracts include home warranty contracts, HVAC maintenance contracts, pool maintenance contracts and many more.