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New Tax Law Affecting Real Property Contractors and Retailer-Contractors

New legislation effective January 1, 2015, makes a distinction between real property contractors and retailer-contractors and specifies clearly when sales and use tax must be paid for the purchase of construction materials and other tangible personal property to be used in the performance of construction contracts.  The new law specifies that a “real property contractor . . . includes a general contractor, a subcontractor, or a builder.” See N.C. Gen. Stat § 105-164.3(33a).  The legislation defines a “retailer-contractor,” on the other hand, as a “person that acts as a retailer when it sells tangible personal property at retail and as a real property contractor when it performs real property contracts.”  See N.C. Gen. Stat § 105-164.3(35a).

 

The North Carolina Department of Revenue has issued guidance (http://www.dornc.com/taxes/sales/impnotice111914_realpropcontracts.pdf) regarding the new legislation:

[A] real property contractor is the consumer of the tangible personal property that the real property contractor installs or applies for others and that becomes part of real property.  . . . Where a taxpayer is a real property contractor who does not meet the definition of a retailer-contractor purchases tangible personal property for storage, use, or consumption in this State and the tax due is not paid at the time of purchase, the taxpayer must report and pay the general 4.75% State and applicable local and transit rates of sales and use tax on the purchase price of such tangible personal property.

 

[A] retailer-contractor that purchases tangible personal property to be installed or affixed to real property may purchase items exempt from sales and use tax under a certificate of exemption . . . provided the retailer-contractor also purchases inventory items from the seller for resale.  When the tangible personal property is withdrawn from inventory by a retailer-contractor and installed or affixed to real property, use tax must be accrued and paid on the retailer-contractor’s purchase price of the tangible personal property. . .   Tangible personal property that the retailer-contractor withdraws from inventory for use that does not become a part of real property is also subject to . . . sales and use tax.

 

If a retailer-contractor subcontracts any part of the real property contract, sales and use tax is payable by the subcontractor on the subcontractor’s purchase of tangible personal property that is installed or affixed to real property in fulfilling the contract.  The retailer-contractor, the subcontractor, and the owner of the real property are jointly and severally liable for the sales and use tax.  The liability of a retailer-contractor, a subcontractor, or an owner who did not purchase the property is satisfied by receipt of an affidavit from the purchaser certifying that the sales and use tax has been paid.

 

In other words, a real property contractor is responsible the payment of sales and use tax when it purchases materials or supplies for use in a construction project.  A retailer-contractor is an entity that is able to act as either a retailer or a contractor.  When a retailer-contractor is acting as a contractor, it is responsible for payment of sales and use tax in the same manner as a real property contractor.  A retailer-contractor may still make tax-exempt purchases of materials, but sales and use tax must be paid for those materials once they are withdrawn from inventory and used in the performance of a construction contract.

 

Dungan, Kilbourne & Stahl, P.A. is pleased to provide more information about the most recent legislation affecting builders and contractors, and we also offer our clients periodic check-ups of their policies and procedures to ensure continuing compliance with corporate law and the latest revisions to the lien statute.  Please contact us to schedule an appointment.

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