Understanding North Carolina Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in North Carolina.
North Carolina assesses a 4.75 percent state sales tax on the retail sales price of tangible personal property and on a limited number of services. These taxable services are
- hotel and motel rentals;
- dry cleaning, laundry, and similar services;
- sales of gas and electricity; and
The “combined general rate” that applies to sales of telecommunications and ancillary services, video programming, and spirituous liquor other than mixed beverages is 7 percent.
North Carolina also authorizes its counties to assess additional sales and use taxes.
Leased property. In general, all leases and rental agreements involving tangible personal property are treated as sales. As a result, leased and rented property is subject to sales tax.
How to Calculate Sales Tax Due
You calculate sales taxes by taking the tax rate, which is 5.75 percent, and multiplying it by your gross receipts from sales. Gross receipts are based on your total retail sales or services provided to your customers. The state allows you to take a credit against use tax if you have already paid sales or use tax to another state on the property purchased. This credit cannot exceed the amount of sales tax assessed in North Carolina.
Absorbing Sales Tax Is Prohibited
You will be responsible for collecting the sales tax for North Carolina. State law does not allow you to pay the tax out of your pocket (known as absorbing the tax). Instead, you must pass it on to your customers. If the Attorney General discovers that your business is advertising a "no sales tax" strategy, you will be guilty of a misdemeanor.
Many Sales May Not Be Taxable
North Carolina allows exemptions from sales tax based on the type of time, the type of transaction (such as a resale exemption) or the nature of the organization purchasing the product (such as a charitable organization).
Purchases for Resale Are Not Taxed
Purchases of goods or products the will be resold in the course of the purchaser's business or included in the service the purchases provides are exempt from sales tax. However, the purchaser will have to collect sales tax from the end-users (customers) when they purchase the goods or products.
Resale exemption certificates. In order to obtain a resale exemption, the seller may require the buyer to present, in good faith, a resale certificate. The state doesn't provides a specific certificate form, so the purchaser is free to develop the resale certificate document. With that said, though, the document should at least contain the following information:
- the purchaser's and the seller's name and address
- an indication of the general character of the property purchased
- the buyer's registration number or resale number or the foreign certificate of resale if for an out-of-state purchaser.
North Carolina Allows Blanket Resale Certificates
North Carolina allows you to accept blanket resale certificates from customers. A blanket resale certificate is a resale certificate provided the seller by those customers who make numerous exempt resale purchases. The idea is that by maintaining a blanket resale certificate, both the seller and the buyer can avoid the hassle of having to present a certificate every time there is a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, you should require that the purchaser present, in good faith, a blanket resale certificate that contains the same information as the regular resale exemption certificate.
Physical Presence Required for Tax Liability
North Carolina has a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if your business has physical presence within North Carolina. To determine if you have a physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse, or any office space in North Carolina? Maintaining retail or warehouse facilities means that your business has a physical presence within the state. Also, if you have an office for employees, even for business activities unrelated to mail order sales, your business will have a physical presence within the state.
- Do my employees or I enter North Carolina for purposes of taking and transmitting orders from customers in North Carolina? If your employee or independent contractor enters North Carolina for purposes of taking or transmitting orders, your business has a physical presence in North Carolina. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence within the state.
- Do my delivery vehicles frequently enter North Carolina for purposes of delivering property? Frequent deliveries in North Carolina by your trucks will give you physical presence in North Carolina. An occasional delivery, however, may not constitute a physical presence within the state.
How to Claim Refund of Overpaid Taxes
If you frequently audit your sales transaction reports, you may discover that through an error, sales or use tax was overpaid on a transaction. If you or your customer discover such an overpayment, the state allows you or your customer to file a claim for a credit or refund. You or your customer should submit the claim on forms furnished by the North Carolina Department of Revenue. The State will normally issue a credit memorandum rather than give a refund to the person who made the erroneous payment. The state will not issue this credit memo until you have refunded the amount of the overcharged tax to your customer.
Time limitations for filing a refund claim. If you're going to file a refund claim for overpayment of sales or use tax, you'll have to do it within three years from the date you paid the tax. If you file a refund claim after that time, the state will not approve it.
North Caroline Imposes Use Taxes
In order to avoid losing tax revenues on sales transactions taking place outside the state, North Carolina also imposes a use tax. The use tax is assessed against all persons who store, use, or otherwise consume tangible personal property in North Carolina that was purchased out-of-state. If the out-of-state seller you purchase property from is a registered retailer in North Carolina, you should pay the use tax to the retailer. If the retailer is not registered in North Carolina, you should pay the use tax directly to the state.