The North Carolina Department of Revenue has issued a directive explaining new legislation that took effect January 1, 2014, that imposes sales tax at a rate of 4.75 percent on certain service contracts that previously were treated as non-taxable.

Under North Carolina law, service contracts are defined as warranty agreements, maintenance agreements, repair contracts, and similar agreements to maintain or repair tangible personal property.  The new tax applies to most service contracts except for those covering items tangible personal property that otherwise would be tax exempt.  Thus, for example, service contracts covering new and used cars, computers, ATVs and the like will now be taxed, while contracts on existing systems that are permanently attached to real property (HVAC systems, garage doors, etc.) will remain untaxed.

North Carolina is the latest in a number of states that have changed or clarified their laws in the last several years to mandate the taxation of certain service contracts.  Other states that have taken such action include, for example, Indiana (Department of Revenue Bulletin, March 1, 2013), Maine (Department of Revenue Bulletin, October 9, 2013, applicable to service contracts and warranties related to cars and trucks), and Vermont (Department of Taxes Bulletin, January 3, 2011).