Last Friday, the NC Department of Revenue (DOR) released its E-589CI, Affidavit of Capital Improvement, which generally will be required to substantiate that a contract, or a portion of work to be performed to fulfill a contract, is to be taxed for sales and use tax purposes as a real property contract with respect to a capital improvement for real property.
The North Carolina Home Builders Association (NCHBA) has prepared a summary explanation of these changes in the sales and use tax applicable to residential construction, amended to include information about the newly released affidavit. Click here to download their summary. In short, labor charges for new construction and most remodeling activities are not subject to sales tax on labor because they will meet the definition of “capital improvement” pursuant to a “real property contract”.
However, except in limited circumstances, the DOR is requiring that E-589CI be provided by a general contractor to a subcontractor to substantiate that the subcontractor’s labor is for a “capital improvement”. DOR states that failure to provide this form “subjects the transaction to tax as a retail sale of repair, maintenance, and installation services.”
The NCHBA summary also contains links to directives issued on 11/15/16 by the Department of Revenue about these changes.