The North Carolina Department of Revenue (DOR) has issued Directives and Important Notices regarding the upcoming sales and use tax law changes that will take effect in that state beginning on March 1, 2016 (unless otherwise noted). Specifically, these directives and notices relate to the new law changes affecting repair, maintenance, and installation services; service contracts; and qualifying datacenters.

Changes in law related to repair, maintenance, and installation services

General guidance

Under new law, North Carolina retailers are liable for state and local sales or use tax derived from "repair, maintenance, and installation services" sold at retail and sourced to the State.¹ Additionally, the excise tax² applies to the purchase price of "repair, maintenance, and installation" charges sourced to North Carolina. As a result of the repeal of the exemption in N.C. Gen. Stat. Section 105-164.13(49), installation charges are considered part of the "sales" or "purchase" price generally taxed under N.C. Gen. Stat. Section 105-164.4(a)(1). Such installation charges will be taxable even if separately stated. The term "repair, maintenance, and installation services" includes: (a) keeping tangible personal property (TPP) or motor vehicles in working order; (b) (attempting to) calibrate, restore TPP/motor vehicle; (c) (attempting to) troubleshoot or identify source of problem with TPP/motor vehicle; and (d) installing or applying TPP that is not accomplished by a real property contractor under a real property contract. The sale for resale exemption may apply to these repair, maintenance, and installation services.³

The term "retailer" clearly excludes real property contractors operating solely in that capacity and persons providing only "repair, maintenance, and installation services" that do not otherwise meet the definition of retail trade.⁴ Thus, a real property contractor or a person who's only business activity is providing repair, maintenance, and installation services is not liable for sales and use tax on gross receipts derived from such services affecting real property.

An exemption is available for "repair, maintenance, and installation services" provided for an item, other than a motor vehicle, for which a service contract on such item is exempt under N.C. Gen. Stat. Section 105- 164.4I.⁵ This exemption applies to "repair, maintenance, and installation services" for: (1) items exempt under Article 5 of Chapter 105 of the N.C. General Statutes, other than a motor vehicle, including items exempt under N.C. Gen. Stat. Section 105-164.13 and items exempt from tax under N.C. Gen. Stat. Section 105-164.13E for qualifying and conditional farmers; (2) network assets contained on utility-owned land, right of way or easement; (3) items purchased by a professional motorsports racing team (expires 2020); (4) qualified aircraft or jet engines; and (5) items subject to tax under Article 5F of Chapter 105 — items subject to the 1% privilege tax for certain machinery & equipment. (emphasis added)

The imposition of sales and use tax on repair, maintenance, and installation services does not apply to "repair, maintenance, and installation services to fulfill a manufacturer's or dealer's warranty. For additional information and specific examples, see Directive Number SD-16-2 (issued Feb. 6, 2016).

In addition to Directive Number SD-16-2, the DOR issued guidance for specific industries or transactions, which are summarized below.

Motor Vehicle Repair, Maintenance, and Installation Services

The above discussion concerning the taxability of repair, maintenance, and installation services is applicable when such services are performed on motor vehicles, effective March 1, 2016. The DOR issued a non-exhaustive list of services considered to be repair, maintenance, and installation services for motor vehicles.

For more information, see Important Notice: Motor Vehicles (Installation Charges; Repair, Maintenance, and Installation Services; and Service Contracts) (issued Feb. 11, 2016).

Shoe Repair

One hundred percent (100%) of the sales price of or the gross receipts derived from shoe repair services sold at retail on or after March 1, 2016 are subject to state sales and use tax (and any applicable local and applicable transit rates). Items of TPP purchased for use in shoe repair services such as leather, rubber, cement, or thread that become a part of or attached to the shoes, including the delivery bags, should be purchased for resale and treated as exempt from sales and use tax. Shoe polishing is included within the definition of this taxable service, but not if the person is providing solely shoe polishing services since such person does not meet the retail trade definition. For more information, see Important Notice: Shoe Repair Services (100% Taxable) and Shoe Polishing Services (issued Jan. 22, 2016).

Tire Recapping or Retreading Sales and Services

One hundred percent (100%) of the sales price of or the gross receipts derived from tire recapping or retreading services sold at retail on or after March 1, 2016 are subject to state sales and use tax (and any applicable local and transit rates). Purchases of TPP that become an ingredient or component of the sale or service of recapped or retreaded tires sold to customers, such as rubber products or cement, should be purchased for resale and treated as exempt from sales and use tax. For more information, see Important Notice: Tire Recapping or Retreading Sales and Services — 100% Taxable (issued Jan. 25, 2016).

Watch, Clock, Jewelry and Other Item Repair Sales and Services

One hundred percent (100%) of the sales price of or the gross receipts derived from repair charges sold at retail on or after March 1, 2016 for watch, clock, jewelry or other items by a such repairperson or retailer are subject to state sales and use tax (and any applicable local and transit rates). This includes cleaning sales and services; however, there is a limited exception to this rule that applies only to businesses that solely provide cleaning services. Engraving services are subject to tax effective May 1, 2016, unless (1) the property is subject to another rate of tax and the charge to engrave is made at the time of the sale of the property, (2) the charge is to engrave TPP owned by a customer, or (3) the person is solely providing such engraving services since such person would not meet the retail trade definition. Purchases of TPP that become part of the customer's repaired item, such as watch crystals, clasps or clockhands, should be purchased for resale and treated as exempt from sales and use tax.

For more information, see Important Notice: Watch, Clock, Jewelry, and Other Item Repair Sales and Services (100% Taxable), Cleaning Sales and Services, and Engraving Changes (issued Jan. 27, 2016).

Service Contracts

Service Contracts - Other Than for a Motor Vehicle

The sales price of or the gross receipts derived from the sale or the renewal of a service contract sold at retail is subject to state sales and use tax (and any applicable local and transit rates) regardless of whether the TPP covered in the service contract becomes a part of or is affixed to real property. The term "service contract" is a contract where the obligor agrees to maintain or repair TPP regardless of whether the property becomes a part of or is affixed to real property, or a motor vehicle. "Examples of a service contract include a warranty agreement other than a manufacturer's warranty or dealer's warranty provided at no charge to the purchaser, an extended warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract."

An item or repair, maintenance, and installation services used to maintain or repair TPP is pursuant to a taxable service contract if the purchaser of the contract is not charged for the item or the services are exempt from sales and use tax. The term "item" does not include tools, equipment, supplies or similar TPP used to complete the maintenance or repair that does not become an ingredient or component of the TPP for which the service contract relates. Purchases of an item or repair, maintenance, and installation services to maintain or repair TPP pursuant to a service contract should be purchased for resale and be treated as exempt from sales and use tax.

An exemption is available for the retail sale of a service contract applicable to any of the following: (1) items exempt under Article 5 of Chapter 105 of the N.C. General Statutes, regardless of whether the TPP covered in the service contract becomes a part of or is affixed to real property; (2) network assets contained on utility-owned land, right of way or easement; (3) items purchased by a professional motorsports racing team (expires Jan. 1, 2020); (4) qualified aircraft or jet engines (contracts entered into on or after Oct. 1, 2015); and (5) items subject to tax under Article 5F of Chapter 105.⁶

For more information, see Important Notice: Sale or Renewal of a Service Contract for Tangible Personal Property Changes (issued Feb. 2, 2016).

Service Contracts — Motor Vehicle

The sale or renewal of a motor vehicle service contract that covers the entire motor vehicle, except for exclusions for normal wear and tear for certain items or regular maintenance items, on or after March 1, 2016, is exempt from sales or use tax.⁷ Such a service contract is often referred to as a "bumper to bumper" warranty. The retailer of such a contract must be able to document that the contract covers the entire motor vehicle. Prior to March 1, 2016, the sales price or gross derived from the sale or renewal of a service contract sold at retail for a motor vehicle was subject to tax.

The sales price of a motor vehicle service contract on a leased or rented vehicle or the sales price of a service contract for a specific item of TPP attached to the motor vehicle should not be included in the gross receipts subject to highway use tax, provided that the amount applicable to the motor vehicle service contract is separately stated on the monthly billing or other documentation given to the purchaser. If the amount applicable to the motor vehicle service contract or service contract for the TPP is not separately stated, the amount is deemed to be part of the gross receipts of a lease or rental vehicle and thus subject to the highway use tax.⁸

When the service contract requires a deductible or similar fee due in conjunction with maintenance or repairs completed under the service contract, the taxability of the fee depends on whether it is part of the sales price of a replacement or repair part, or for repair, maintenance or installation services. If the amount paid is part of the sales price of the parts or service, then it is part of the sales price of the TPP or repair, maintenance, and installation services subject to tax.

An item (e.g., replacement or repair part) or repair, maintenance, and installation services used to maintain or repair a motor vehicle pursuant to an exempt service contract is subject to sales and use tax. As discussed in the Repair, Maintenance, and Installation Services section of this Alert, a retailer that provides repair, maintenance, and installation services is subject to tax unless the services are purchased for resale or such person is solely providing these services since such person would not meet the retail trade definition. For example, an automotive repair retailer must charge tax on the replacement of a transmission or for tire mounting services.

For more information, see Important Notice: Motor Vehicles (Installation Charges; Repair, Maintenance, and Installation Services; and Service Contracts) (issued Feb. 11, 2016).

Qualifying Datacenter

Effective on or after January 1, 2016, the sale at retail (or the storage, use, or consumption) in North Carolina of "electricity for use at a qualifying datacenter and datacenter support equipment to be located and used at the qualifying datacenter" is exempt from sales and use tax. "Datacenter Support Equipment" is capitalized property used for one of the following purposes: (a) provision of a service or function included in the business of an owner/user/tenant of a datacenter; (b) generation, transformation, transmission, distribution, or management of electricity, including other capital equipment for these purposes; (c) HVAC and mechanical systems including other capital equipment used for these purposes; (d) hardware and software for distributed and mainframe computers and servers, data storage services, network connectivity equipment, and peripheral components and equipment; and (e) providing related computer engineering or computer science research. A "Qualifying Datacenter" is a datacenter that: (1) meets the wage standard and health insurance requirements of N.C. Gen. Stat. Section 143B-437.08A; and (2) the Secretary of Commerce has made a written determination that at least $75M in private funds has been or will be invested by one or more owners/users/tenants of the datacenter within five years of the date such person makes its first real or tangible property investment in the datacenter on or after January 1, 2012.

The new law also extends the exemption to companies that occupy multi-tenant data centers. The new exemption also allows investment by all tenants in a single data center to be combined to meet the minimum $75 million investment threshold.

If the required level of investment is not timely made or timely made but the specific datacenter support equipment is not located and used at the qualifying datacenter, than the exemption is forfeited. Such forfeiture will require remittance of tax due as if the exemption had not been allowed including interest beginning either when the taxes would have been due or when the datacenter support equipment was put to a disqualifying use. The taxes and interest are due 30 days after forfeiture.

For more information, see Important Notice: Qualifying Datacenter (issued Dec. 15, 2015).

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ENDNOTES

¹ Imposed by N.C. Gen. Stat. Section 105-164.4(a)(16).

² N.C. Gen. Stat. Section 105-164.6.

³ N.C. Gen. Stat. Sections 105-164.13(61b), (62), and (62a).

⁴ N.C. Gen. Stat. Section 105-164.3(35).

⁵ N.C. Gen. Stat. Section 105-164.13(61a); there are some exceptions to motor vehicle related services under N.C. Gen. Stat. Section 105-164.13(62a).

⁶ N.C. Gen. Stat. Section 105-164.4I(b).

⁷ N.C. Gen. Stat. Section 105-164.4I(b).

⁸ N.C. Gen. Stat. Section 105-164.4I(b); N.C. Gen. Stat. Section 105-187.5(a).