signed into law a bill supported by REBIC, the North Carolina Association of Realtors® (NCR), NAIOP Charlotte, BOMA Greater Charlotte, and other industry trade groups, clarifying that residential and commercial Property Management agreements are largely not subject to the state’s Repair, Maintenance & Installation (RMI) sales tax.
SB 523 — Revenue Laws Clarifying & Administrative Changes, passed the General Assembly earlier this month with an amendment that requires Property Management companies to charge and remit RMI sales tax only in the following circumstances:
They provide repair, maintenance, installation services for an additional charge above what is stated in the management contract.
They arrange for a third party to provide the repair, maintenance, and installation services and impose an additional charge for arranging these services.
More than twenty-five percent (25%) of the time spent managing an individual real property during a billing or invoice period is attributable to taxable repair, maintenance, and installation services. The property manager can voluntarily provide a written affidavit to attest that no more than 25% of their services on a given property constitute taxable RMI services, which would clear them of liability for taxation on any portion of the contract amount.
The legislation also provides specific exclusions to RMI services, which help ensure much of the work done by property management companies is not subject to taxation. They are:
To troubleshoot, identify, or attempt to identify the source of a problem for the purpose of determining what is needed to restore the real property to working order or good condition.
To inspect or monitor the real property, including the normal operation of all systems that are part of the real property.
For property managers across North Carolina, the new law provides much-needed clarity on when to assess and remit sales tax on repair, maintenance and installation services that are provided as part of a comprehensive property management agreement. State law has always excluded Property Management agreements from the retail sales tax, but the language in this amendment offers guidance how incidental RMI, or ‘handyman’ services, are treated when provided as part of the agreement.
The 25% threshold is particularly critical, as it allows property management companies to avoid hourly tracking of the work done by their team on a given property to ensure compliance with state tax law. The amendment says the substantiation for this claim must be ‘based on a reasonable approximation of the real property management services provided and supported by the person’s business records kept in the ordinary course of business.
The law also provides a two-year grace period, ending January 1, 2021, during which time the Department of Revenue shall assess no taxes or penalties on property management companies that fail to collect sales tax on RMI services provided under a service contract.
Thanks to David Pitser and Portia Lee with Childress-Klein for their invaluable help on this critical issue!