Effective March 1, 2016, certain repair, maintenance and installation (RMI) services performed on tangible personal property and motor vehicles are subject to sales tax. It is critical for both vendors and consumers of these services to familiarize themselves with these rules. As with sales tax on products, if sales tax should have been charged but was not, a corresponding use tax is owed by the customer.
What are RMI services?
An important consideration is whether or not the services provided are considered RMI services. RMI services are those performed on tangible personal property or motor vehicles and include the following activities:
- To keep or attempt to keep in working order to avoid breakdown and prevent repairs.
- To calibrate, restore, or attempt to calibrate or restore to proper working order or good condition. This activity may include replacing or putting together what is torn or broken.
- To troubleshoot, identify, or attempt to identify the source of a problem for the purpose of determining what is needed to restore to proper working order or good condition.
- To install or apply.
Which RMI services are taxable?
Unfortunately, it will not always be straight-forward to determine which RMI services are taxable.
One rule of thumb to consider is that if the underlying property is subject to sales tax, then the associated RMI services may also be taxable. If, however, the underlying property is not subject to sales tax, then the associated RMI services should not be taxable.
The most significant variable in determining which RMI services are taxable has to do with the classification of the service provider. This means that the exact same service might be taxable when provided by one business but not taxable when provided by another business.
“Retailers” and “retailer-contractors” will continue to charge sales tax on their retail sales of tangible personal property. Retailers, those with a majority of revenue coming from retail sales of tangible personal property, will also charge sales tax on all RMI services. Retailer-contractors, those making a majority of their money from services instead of retail sales, will also charge sales tax on RMI services unless those services are in the performance of a real property contract. Lastly, certain businesses may provide only real property contract services or RMI services and make no retail sales of tangible personal property. In that event, none of those services are subject to sales tax.
In summary, the following RMI services are taxable:
- All RMI services provided by retailers; and
- RMI services provided by retailer-contractors that are not performed as part of a real property contract.
Customers may not know the classification of the service provider, making it hard to determine if the RMI services are taxable. Customers will therefore need to rely largely on the representation of the service provider.
A few examples of businesses that should carefully consider these new rules are those making retail sales of and providing services for the following products:
- Building supply
- Automotive, boat or motorcycle
- Computer and technology
- Clothing, including jewelry and shoes
- Musical instruments and equipment
- Outdoor equipment
- Sports equipment
On February 5 the Department of Revenue issued two directives that provide further guidance, including clarification of these rules, additional examples and specific exemptions.
Despite this guidance, NC’s taxation of RMI services is new, and it will take effort to consider how the rules apply to particular circumstances.
Contact JPS to help you evaluate these rules for your business.