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Why the North Carolina Digital Property Tax Matters

The shift in buying habits can have a real impact on your retail clients' sales tax revenue, because state sales tax policies don’t change as swiftly as technology. But it is changing state-by-state.

Sep 19th 2019
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In North Carolina, for example, the State Legislature recently made several clarifying changes to its sales and use tax law that are worth noting.

North Carolina’s Senate Bill 253 removes the phrase “would be taxable … if sold in a tangible medium,” effective October 1, 2019. Taxing digital content is still complicated, but it should soon be slightly less complicated in that state. The state had extended sales and use tax to “certain digital property” (e.g., audio works, audiovisual works, books, greeting cards, photographs, etc.) on January 1, 2010.

The law specified that tax applies to “digital property that is delivered or accessed electronically, is not considered tangible personal property, and would be taxable … if sold in a tangible medium” (emphasis mine). Sales tax therefore couldn’t be applied to any digital product that didn’t have a taxable physical counterpart. That’s become more and more limiting, given SB 253.

According to the Legislature, this policy has “created confusion with respect to items that may fall into one of the digital property categories, but do not necessarily have a tangible corollary.” For example, e-learning materials that accompany a continuing education course are considered “audiovisual work,” but without a taxable tangible corollary, the Department of Revenue has concluded they can’t be subject to tax.

Other Sales Tax Changes

The Bill makes several other clarifying changes to North Carolina’s sales and use tax laws, including:

• Defines a property management contract and provides when repair, maintenance, and installation (RMI) services provided by a real property manager under a property management contract are taxable; and establishes a grace period under which property managers cannot be assessed for failure to collect sales tax on RMI contracts through January 1, 2021. (Effective immediately.)

• Exempts limited service car washes (the cleaning of a car by a mechanical means, where no cleaning activities are performed by a person). (Effective October 1, 2019.)

• Exempts equipment used in cutting, finishing, polishing, and shaping rough cut slabs of stone and stone-like products sold to a company that primarily provides made-to-order countertops, tubs, or walls. (Effective October 1, 2019.)

• Exempts certain incontinence supplies that are paid for by the state Medicaid program. (Effective October 1, 2019.)

• Exempts sales of admissions to charges to attend instructional seminars, conferences, or educational workshops where entertainment is secondary. (Effective immediately.)

• Tax utilities charges (billed to a customer) that are included in the gross receipts derived from the provision of those services. (Effective immediately.)

• Requires that the lowest common sales and use tax rate applies in a ZIP code area that has more than one rate. (Effective immediately.)

• Taxes all repair, maintenance, and installation services at the general rate even when the underlying item (e.g., a boat or aircraft) is subject to a different rate of tax or to a maximum tax. (Effective immediately.)

See the text of SB 253 and the guide to Senate Bill 253 for more details about the forthcoming changes. See the North Carolina Department of Revenue for information about the current taxation of digital property.

Redefining the Economic Nexus Threshold

As of October 1, 2019, the economic nexus threshold for remote sellers is based on the sum total of the sales price of all items, with “items” defined as “tangible personal property, certain digital property, or a service unless the context requires otherwise.” 

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