North Carolina Makes Changes to Taxation of Service Contracts

North Carolina has issued a notice regarding changes to the taxation of service contracts. Effective October 1, 2014, a privilege tax at the 4.75% general state and applicable local and transit rates is imposed on the sales price of or the gross receipts from a service contract sold at retail. “Service contract” is defined as a contract where the obligor under the contract agrees to maintain or repair tangible personal 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 “obligor” is a person who is legally, or contractually, obliged to provide the services for the service contract to the purchaser. A “facilitator” is a person who contracts with the obligor of the service contract to market the service contract and accepts payment from the purchaser for the service contract. The sales and use tax on the sale of a service contract is due and payable by the retailer. The retailer is determined as follows:

• when a service contract is sold at retail to a purchaser by the obligor under the contract, the obligor is the retailer;

• when a service contract is sold at retail to a purchaser by a facilitator on behalf of the obligor under the contract, the facilitator is the retailer; or

• when a service contract is sold at retail to a purchaser by a facilitator on behalf of the obligor under the contract and there is an agreement between the facilitator and the obligor that states the obligor will be liable for the payment of the sales and use tax, the obligor is the retailer.

Retailers must report the sales on an accrual basis of accounting for sales and use tax purposes, notwithstanding that the retailer may report sales and use tax on the cash basis for other sales at retail. The sales and use tax is due at the time of the retail sale, notwithstanding any portion that may be financed. If the sales price of or the gross receipts derived from the sale of a service contract is financed in whole or in part, the financed amount included in each payment is exempt from sales and use tax if the amount is separately stated in the contract and on the billing statement or other documentation provided to the purchaser at the time of the sale. Special rules apply to service contracts to real property depending on whether the contract is sold at the same time as the equipment installed into real property or if it is an extension of an existing contract. (Important Notice: Service Contracts, North Carolina Department of Revenue, September 26, 2014)