North Carolina Sales Tax

[erchess]

Client buys then resells and installs water and air purification systems made by GE. Not sure if his source is GE or a middleman. Most systems are financed through a subsidiary of GE. He tells me that he pays NC Sales tax on everything and upon advice of seller has not been charging/collecting or sending in NC Sales Tax. Is this correct? If not, what should we do?

[DaveO]

I'm in Nebraska but...

Here there are 3 options for sales tax.
Maintain a tax paid inventory and charge sales tax only on labor if taxable.
Maintain a tax free inventory and charge on labor (if taxable) and the inventory item.
Maintain a tax free inventory and pay use tax on the item as it is removed from inventory and sales tax on labor if taxable.

These are for contractors who attach personal property to real property.

[JoshinNC]

Sounds bassackwards to me!

Client buys then resells and installs water and air purification systems made by GE. Not sure if his source is GE or a middleman. Most systems are financed through a subsidiary of GE. He tells me that he pays NC Sales tax on everything and upon advice of seller has not been charging/collecting or sending in NC Sales Tax. Is this correct? If not, what should we do?

I'm in NC and that makes no sense. He should be exempt from sales tax on the purchases from GE and should be collecting sales tax on the sales to final customers. If selling to a reseller than he collects no sales tax. Of course, no sales tax on labor/installations in NC.

[erchess]

TY Josh

but now what do we do? Is it enough to turn over a new leaf starting at once or do we have to figure and pay (presumably with penalty and interest) what should have been collected and sent in going back to August? I have half a mind to take the man into the NCDOR Office and have him throw himself on the mercy of the court.

[winnie]

good luck throwing yourself on the mercy for NC sales tax

I am also from NC. They want that sales tax and penalty and interest!! Certainly try on abatement of penalty, but tell your client to prepare to pay. I concur with the previous posts and don't see any reason why he would not be remitting sales tax. Good luck and would be curious to know how it turns out.

[JoshinNC]

I would go back and prepare the sales tax returns

but now what do we do? Is it enough to turn over a new leaf starting at once or do we have to figure and pay (presumably with penalty and interest) what should have been collected and sent in going back to August? I have half a mind to take the man into the NCDOR Office and have him throw himself on the mercy of the court.

and schedule a meeting with a rep from DOR. Go with your client and explain the situation. They will set up an installment agreement to pay over a short (6-12 month) time frame. It's much better to be up front with them than to get caught.
The problem is you can't go back and collect the sales tax now from the customers, but it's still owed. A tough lesson to learn!

[JohnH]

NC Penalty

Also, once you have all the numbers together you can at least get the largest penalty abated in full and 1/2 of the second largest penalty abated, provided he is otherwise compliant. You might be able to do better if you get the NC revenue agent on your side.

[erchess]

Thank you everyone

I like the idea of preparing the forms and asking for abatement of the penalty. There won't be that much tax because I am sure that total sales for 07 began in August and totaled under $20 K. These people will grouse but I do not believe they will ask for an installment plan if as I assume they could pay a penny less by paying all at once.

Two more questions tho

1. Isn't it the case that in NC some businesses pay annually and some quarterly while only the very high volume outfits pay monthly or biwekly? When are sales taxes due for annual and quarterly filers?

2. Suppose that people who bought systems were charged one price where the only variable was which unit or units were installed and where there was no itemization of parts and labor. (I am fairly sure this is correct.) How do we determine the value of the parts for sales tax purposes? Can we use what the company paid for them or must we mark that price up?

[BOB W]

Wait a minute>>>> GE must feel that this sale and installation is a capital improvement. I am inclined to agree with GE but would like to know the extent of the installation. Some of these purification systems are very involved and much like installing a hot water system, very permenent................

So before you put your client through this, call Sales Tax and get an opinion on this sale and installation from them.........

[Golden Rocket]

Nothing to do with GE

...nothing to do with GE; tax assessable on the selling price to the customer, not the purchase price. Lots of contractor-types want to avoid the hassle and liability for sales tax by claiming they pay it "up front" from the supplier.

Most of the people answering have been from NC, and I'm sure they know better than I do. But I haven't heard anyone suggest that the client attempt to take a partial credit. And that would depend on the state. My state would allow a credit as follows:

State sales tax rate: 7% Local tax rate: 2.5% Total 9.5%.

Contractor purchases Heat Pump $1800, and charges customer $2500 installed price.
Labor is taxed if an integral part of something purchased. The client mentioned in this post would pay 9.5% on $1800, or $171.00, and then collect only $2500 from customer.
The proper amount of tax would be on $2500, or $237.50. The client's perception of liability has thus shortchanged the state $66.50.

To correct this mess in my state:
Proper amount of tax: $237.50
less amount of state tax already paid: ($126.00) (7% state portion only)
Amount payable with correction: $111.50

Long story made short: He would have to cough up money but explore and see whether credit for tax already paid would be proper.

[BOB W]

...nothing to do with GE; tax assessable on the selling price to the customer, not the purchase price. Lots of contractor-types want to avoid the hassle and liability for sales tax by claiming they pay it "up front" from the supplier.

Most of the people answering have been from NC, and I'm sure they know better than I do. But I haven't heard anyone suggest that the client attempt to take a partial credit. And that would depend on the state. My state would allow a credit as follows:

State sales tax rate: 7% Local tax rate: 2.5% Total 9.5%.

Contractor purchases Heat Pump $1800, and charges customer $2500 installed price.
Labor is taxed if an integral part of something purchased. The client mentioned in this post would pay 9.5% on $1800, or $171.00, and then collect only $2500 from customer.
The proper amount of tax would be on $2500, or $237.50. The client's perception of liability has thus shortchanged the state $66.50.

To correct this mess in my state:
Proper amount of tax: $237.50
less amount of state tax already paid: ($126.00) (7% state portion only)
Amount payable with correction: $111.50

Long story made short: He would have to cough up money but explore and see whether credit for tax already paid would be proper.

In NYS, materials used in a capital improvement installation are taxed at the contractor purchase price. The contractor is required to pay all sales tax when the materials are purchased to the supplier or pay a use tax if purchased from an out of state supplier that does not collect the sales tax.

Since, in NYS, capital improvement labor is not subject to sales tax, the whole installation is sales tax free to the final user. When an installer prices his job he figures his cost of materials including sales tax paid on the materials.

[BOB W]

Something does not seem right here:

Josh said: "Of course, no sales tax on labor/installations in NC."

I have a client in NC also, and I agree> No sales tax on labor.

Since the ST was already paid on the unit the whole sale should be exempt. If you are trying to say that the unit was marked up and invoiced separately from the labor, well that may be a invoicing proceedure that needs to be corrected.

Golden Rocket says: "Labor is taxed if an integral part of something purchased. The client mentioned in this post would pay 9.5% on $1800, or $171.00, and then collect only $2500 from customer.
The proper amount of tax would be on $2500, or $237.50. The client's perception of liability has thus shortchanged the state $66.50."

NC does not charge sales tax on labor regardless if capital improvement or not.

[Golden Rocket]

Difference in States

Yes Bob -- something is wrong with this picture, and it stems from differences in state sales taxation.

Thank you for having the patience to read through my example, but it was predicated on the sales tax laws in Tennessee. "Services" are exempt, but if there is labor associated with a purchase, the entire amount is taxable. There are also dozens of total exemptions from tax for special interest groups such as newspapers, etc.

In the days of tax-exempt labor in our state, for the proverbial $2500 heat pump example, sales tax auditors would find $100 in material and $2400 in labor. After years of putting up with growing abuse, they finally made the entire bill taxable, but continued to exempt services so that lawyers (2/3 of the TN general assembly) would not have to add sales tax to their invoices.

I don't know the situation in North Carolina.

[winnie]

from NC

NC does not care whether you have already paid sales tax on the purchase of inventory for resale. Taxpayer should not have paid that tax, but it is not the DOR's problem that it was paid. Taxpayer's responsibility is to pay sales tax on the sales of product that they sell to customers. I have been through this with a revenue agent with a plumber (new client at the time) who felt like they didn't need to charge or pay sales tax to the state because they paid sales tax when they purchased inventory.

[BOB W]

Winnie> If that is the case you should try to get a refund from GE for the sales tax paid to them and submit a resales certificate to GE.