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New construction – The NC Department of Revenue’s new blueprint for taxing real property improvements

By Brett Becker

Special to North Carolina Construction News

In an effort to increase revenue, North Carolina instituted various taxes on the services industry Now, it applies to contractors who perform repair, maintenance and installation services contracts. The introduction of services taxes has been riddled with issues. In an effort to make sense of it all, below are quick tips on the blueprint.

Real property contracts and defining capital improvements

Contractors performing real property contracts for capital improvements are explicitly exempt and remain as they have always been with no tax to be collected from the property owner. This does little to clear up when the contractor must collect taxes, without understanding (1) who is a real property contractor and (2) what are capital improvements.

  1. In order to qualify as a “real property contract,” improvements must be pursuant to an agreement to perform construction, reconstruction, or remodeling with respect to a capital improvement to real property.
    • New construction is the construction of or site preparation for a permanent new building, structure, or fixture on land or an increase in the square footage of an existing building, structure, or fixture on land;
    • reconstruction is the rebuilding of a permanent building, structure, or fixture on land; and
    • remodeling is the process of improving or updating a permanent building, structure, or fixture on land or major portions thereof.
  2. A capital improvement includes any addition or alteration to real property that:
    • Becomes part of the real property, or
    • is permanently installed or applied to the real property so that removal would cause material damage to the property or to the article itself.

There is no bright-line rule, but if the work requires a permit, then it is most likely a capital improvement. The grey area surrounds work that falls between new construction and maintaining older construction. Replacement or installation of roofing, septic tanks, plumbing, electrical wiring, commercial refrigeration, and similar improvements is likely a capital improvement. However, replacing damaged exterior bricks, countertops, a single plumbing fixture, and other improvements one might expect to be treated as capital improvements, are identified as repair, maintenance, and installation services.

Collecting tax on a repair, maintenance, and installation service contract

When fulfilling a repair, maintenance and installation services contract, the contractor purchasing the personal property consumed in the project should issue Form E-595E to the retailer. This allows the contractor to pass on the purchase for resale to the property owner. The contractor should then collect the sales and use tax from the property owner on the total gross price of the contract.

In essence, the tax collected is for both the items used in the project and services performed, and is collected from the owner. Purchases of any tools or the like will still be taxed at the time of sale and collected by the retailer.

Special mixed transaction

Often times, a project owner decides to take care of “one more thing” since work is already being done. This can cause a capital improvement to become a service that would otherwise be taxable. The legislature accounted for this issue by setting 10 percent of the contract cost as the magic demarcation line.

Consider this: a contractor is performing renovations to one side of a home, but is asked to also repair a hole in a wall on the other side of the home. If the price of repairing the hole does not exceed 10 percent of the contract price, it simply becomes part of the real property contract for capital improvement. No tax is collected from the owner.

When the 10 percent threshold is exceeded (Note: the threshold is greater than 10 percent; so 10 percent is exempt), sales or use tax applies to the services portion of the contract to fix the hole in the wall, and the contractor must allocate a price for each taxable repair, maintenance, and installation service and then tax that service.

Maintain your records – Affidavit of Capital Improvement

Form E-589CI is a record of proof to substantiate work was performed with respect to a capital improvement, thereby not subjecting the contractor to a collection of the services tax. Failure to maintain this document subjects the contractor to tax liability. The affidavit is filled out by the hiring party (owner, tenant, or real property contractor).

If you have not yet been asked to provide an E-589CI by a party you contract with, expect to in the future. Even more, you should be requesting these yourself.

Brett Becker is a construction lawyer with Nexsen Pruet based in Greensboro, NC. His practice focuses on a wide range of construction matters, representing general contractors, subcontractors, owners, and suppliers. He may be reached at (336) 387-5150 or

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