Raleigh, N.C. — Early drafts of a bill that would "clarify" a 2015 law that imposes sales taxes on certain services would end up raising $140 million more every year than the current law, according to documents and staff comments made during a Senate Finance Committee on Tuesday.
Committee members did not vote on the measure, Senate Bill 870, but rather reviewed tables showing taxable and nontaxable items as well as an update bill draft and summary. Those documents generally describe an effort to make sure the same service is treated the same way no matter who provides it.
For example, one reading of current law requires a home improvement store that both sells and installs carpet to charge sales taxes on both the good – the carpet – and the service – installation. However, if a homeowner were to buy the carpet and then contract separately for the installation, that independent installer would not have to charge sales tax.
"You cannot have two businesses providing the same services and being treated differently. That's the whole crux of this bill," Sen. Bob Rucho, R-Mecklenburg, told the committee.
The combined state and county sales tax rate is 6.75 percent throughout much of the state, although some counties such as Orange County charge slightly more. For much of North Carolina's history, that tax has applied only to certain goods, but rarely services. But with as much as 70 percent of the state's GDP bound up in the purchase of services, lawmakers began imposing sales taxes on services last year.
That move allowed lawmakers to lower the personal income tax rate in the state.
However, Rucho warned his colleagues that further expansion of the sales tax base would be needed. Right now, he said, the taxes apply only to blue collar tradesmen such as car mechanics and plumbers.
"At some point, and in the very near future, you need need white collar jobs also," Rucho said.
Lawyers, veterinarian practices and other professions would need to be included in the state's sales tax system eventually, he said.
As of now, Senate Bill 870 draft sticks to sorting out the changes made last year, and it provides a grace period to businesses that should have been collecting the tax but were confused by the initial bill. Rucho said that taxpayers who make a good faith effort to comply shouldn't suffer due to confusing legislative language.
Parts of the bill attempt to close loopholes in the current law, which says that sales tax must be paid on repair, maintenance and installation services if they are sold with physical items on which consumers already pay sales tax, such as refrigerators. The law also taxes the maintenance of real property, which some service providers have tried to creatively dodge.
For example, at least one pool maintenance company has argued that it is maintaining the water in a pool, not the pool itself, and should not have to pay sales tax since water delivered through city pipes isn't taxed.
In addition, the bill also clarifies when certain services should not be taxed. For example, housekeeping and janitorial services should not be taxed like property maintenance services, but one senator said the Department of Revenue is trying to charge sales tax on large property cleaning contracts.
"Right now, the community college (in my district) has a bill of a half million dollars as it relates to DOR's interpretation of that janitorial service contract," Sen. Joel Ford, D-Mecklenburg, said. "I imagine if my community college is experiencing that, then everybody else is too."
Staff members and other senators said they would review that issue before the bill comes up for a vote.
Finance Committee members said they would move forward with the measure later in this summer's session.