Since North Carolina’s sales & use tax on Repair, Maintenance & Installation (RMI) services took effect on January 1st, numerous questions have arisen about the implications for managers of real property, whose service agreements typically contain some services that are covered by the tax, and others that are not.
Recent meetings with General Assembly legislators and staff, as well as with senior officials from the Department of Revenue, have provided some clarification for property managers, as well as direction on how to comply with the new tax law. The following is in no way intended to be tax advice, but rather a summary of the key points gleaned from these meetings. For specific tax advice on how your business can comply with the RMI sales tax, please consult a qualified tax professional.
First, it is important to understand what types of RMI services are EXEMPT from the tax. These exemptions generally have two distinguishing characteristics, although they need not fall into either category:
Work that constitutes a capital improvement to real property; and,
Work that requires the issuance of a local building permit.
The North Carolina Department of Revenue (DOR) recently issued a 12-page memorandum describing each of the services that are, and are NOT exempt from the RMI tax, and every property manager is strongly recommended to review it in detail. The exemptions cover a wide range of services, from gutter and window cleaning to interior painting and landscape installation. DOR requires that businesses performing any client services considered non-exempt RMI add the applicable state sales tax to the labor portion of their invoice, and remit the taxes collected to the Department of Revenue.
One critical point — the Property Management Fee itself is NOT subject to the RMI Sales & Use tax, unless the fee includes the provision of specific repair, maintenance or installation services that are taxable under state law. In this case, it would be treated as a bundled service’, and the business owner must ‘determine an allocated price for the taxable service portion of the contract, based on a reasonable allocation of revenue that is supported by business records.
Essentially, this means the business must charge an allocated sales & use tax to that portion of the fee that covers repair, maintenance or installation services. If, for example, a firm pays an in-house engineer $30,000 a year to handle maintenance work on 10 different properties, they could allocate a cost of $3,000 to each property and charge the state sales & use tax on that amount.
However, a property management firm that invoices clients separately for any maintenance work done on a property need only apply the RMI tax to the labor portion of that invoice. If an outside vendor, such as an HVAC company, is contracted to do work on a property, that vendor is responsible for adding the RMI tax to the labor portion of their bill.
It is important to note that the Department of Revenue will base its determination of tax liability on what is stated in the property management contract, so firms should pay particular attention to how this language is structured with regard to repair, maintenance & installation services.
A helpful resource is a 36-slide PowerPoint presentation given on March 30th to the Charlotte Chamber Land Use Committee by Eric Wayne, DOR’s Sales & Use Tax Director.
REBIC will continue to work with the Department of Revenue, General Assembly staff, and other industry groups to clarify the statutory language regarding sales tax compliance for Property Management Firms.