"New" Sales Law Affecting Real Estate Transactions Takes Effect

By William W. Nelson, Pete J. Marino and Andrew P. Atkins

A number of amendments to North Carolina’s sales tax laws applicable to the construction industry took effect January 1, 2017. These amendments will provide welcome relief to many contractors engaged in new construction. However, as North Carolina moves to tax more services, the law in this area has become increasingly complicated. 

Prior LAW

North Carolina has historically treated contractors making improvements to real property (known as “real property contractors” under the sales tax law) as the consumer of materials purchased to fulfill their contracts. The contractor thus paid sales tax when it purchased its materials but was not required to collect tax on these materials when they passed to the property owner as part of the improvement. In addition, the contractor was not required to collect tax on its labor charges, since, with minor exceptions, North Carolina historically did not impose sales tax on services.

A business may act both as a real property contractor and as a retailer of tangible personal property. These businesses are known as “retailer-contractors.” For example, a building supplier might sell light fixtures to homeowners at retail in some cases and in other cases might contract with the homeowner to deliver and install the fixture. Historically, when such a business made a retail sale of an item, it had to collect tax on the sale, but when it acted as a real property contractor, it was not required to collect sales tax from the homeowner. Instead it would pay use tax on the cost of the fixture when the fixture was taken out of inventory to fulfill the contract with the homeowner.

On March 1, 2016, North Carolina expanded the sales tax to cover charges for “repair, maintenance or installation” (“RMI”) services. This change was not intended to subject the labor associated with real property contracts to tax, and an exemption was provided for RMI services rendered by a real property contractor in fulfilling a real property contract. Most construction contractors were thus unaffected by the new law.

However, a special rule was also enacted that applied to retailer-contractors who were primarily retailers rather than real property contractors. Specifically, if a retailer-contractor had a NAICS retailer classification or derived a majority of its revenues from retail sales, it could not qualify as a real property contractor and had to charge sales tax on both property and labor provided in performing a real property contract. This special rule for retailer-contractors primarily engaged in retail trade resulted in different sales tax treatment of the same work depending on the character of the person performing the work. If the work was performed by an ordinary real property contractor or retailer-contractor, no tax was due, but tax was due if the work was performed by a retailer-contractor primarily engaged in retail trade. 

new law

Because of the obvious inequities of this regime, the General Assembly made several amendments to the law in 2016, which became effective on January 1, 2017.  

Most importantly, the amendments eliminate the special rule applicable to retailer-contractors primarily engaged in retail trade. As a result, all retailer-contractors can now qualify as real property contractors when they perform real property contracts.

In addition, the amendments limit the definition of a “real property contract” (on which tax is not required to be charged) to contracts that involve “capital improvements” to real property. The definition of a “capital improvement” is very detailed. However, the term includes new construction, reconstruction and remodeling of a building, structure or fixture on land that becomes part of the real property and specifically includes the performance of work that requires the issuance of a state building code permit. Thus, any new home construction should qualify as a capital improvement, and none of the contractors working on the project should have to collect sales tax.  

The Department of Revenue has published a new form called an “Affidavit of Capital Improvement.” A property owner or general contractor should generally provide a copy of this form to contractors and subcontractors to inform them that they are working on a capital improvement and should not charge sales tax.


Cases not involving new construction may not be as clear cut. In many cases it will be important to carefully determine whether a project involves a “capital improvement.” For example, while initial installation of a fixture during new construction may qualify as a nontaxable capital improvement, replacement of that fixture may be taxable. 

In addition, some activities may not be treated as part of a “real property contract” and may therefore be taxable as RMI services unless an exception applies. Although there are numerous exceptions to the definition of taxable RMI services, the precise bounds of these exceptions remain untested. 

Some contracts may cover both nontaxable construction activities and generally taxable RMI services. In such “mixed transaction” cases, tax will have to be collected on the receipts attributable to the RMI services unless those services fall below a de minimis threshold. 

As explained above, real property contractors are liable for tax on the materials they purchase or take out of inventory to fulfill a real property contract. Property owners, general contractors and subcontractors can all be held liable if such taxes are unpaid. Potentially responsible parties can protect themselves by obtaining proper affidavits that the taxes have been paid.


While the tax law changes effective January 1, 2017 do much to resolve inequities in the prior law, the application of the sales tax law to real estate-related transactions has become increasingly complicated. Smith Anderson stands ready to assist you in navigating this new legal landscape. 


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