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Small Business Owners Blindsided by New Sales Tax Changes That Affect Your Wallet

By Jesse Wood

Small business owners in the High Country are upset – to put it lightly – with the new sales tax changes that require taxes to be levied on labor, repair, maintenance and installation services across a swath of industries.

“We are pretty upset. We aren’t happy about it and we are really shocked,” said Ruth Klutz, co-owner of Restoration House with her husband, Tommy. “I don’t think upset is the right word.”

The Restoration House specializes in antique restoration, furniture repair and refinishing, and custom-built furniture on Possum Hollow Road in Blowing Rock. The Klutzes, unlike what is the case for business owners of a different political persuasion, are upset for three reasons – instead of two.

One: like just about every other small business owner that does repairs or offers installation services, the Klutzes said they felt blindsided by the changes and will have to call their accountant to get to the bottom of the new requirements, which of course will also cost money.

Two: they will have to pass on the tax increases to their customers in order to “still come out ahead.”

Three: As Republicans, the Klutz feel duped. A core GOP principle, of course, is no new taxes. The Republican-led N.C. General Assembly enacted the measures and Republican Gov. Pat McCrory signed off on the state budget, which included the new changes, into law.

“We just found out yesterday. As hard as it is for small business to try and stay alive and to read something about this, especially from someone who you are usually for. Everyone knows how we vote,” Klutz said. “We are not happy at all.”

Ruth said that Mr. Klutz was so upset he would probably be better served by not talking to the media.

These new tax changes affect all kinds of industries, including car mechanic and tire shops, clock and jewelry repair, clothing alterations, cabinetmakers, sign makers, installation of tombstones and gravestone markers and other funeral expenses, shoe repairmen, dry cleaning services, reupholstering services, laminating services, auto washing and detailing, installation of modular homes, installation of parts and accessories for boats and boat trailers, and much more – not to mention affecting the services provided by these tradesmen: homebuilders, plumbers, electricians, roofers, HVAC contractors, builders, septic system installers and, again, much more.

The N.C. Department of Revenue has pages and pages of docs detailing the changes that went into effect on March 1. The sales tax statewide is 4.75 percent and the county sales tax percentage is between 2 and 2.5 percent depending on the county.

Judy Hodges at Boone Tire Center said she was also unhappy with the changes when reached on Wednesday afternoon.

“My thought is I used to be able to save my customers money by making the maintenance balance separate from the price of tires [or other parts] – no tax on labor. Now the price for customers is going to go up. Plus, I will have to pay my accountant more money to keep up with additional paperwork, so it will cost me more money,” Hodges said. “And in the interim, they are taking all the new taxes from small businesses and giving a new tax break to the rich people, where does that put us?”

Asked if she had heard a similar response from her peers in the auto and tire industry across the High Country, Hodges unequivocally said yes.

“None of us are happy,” Hodges said.

High Country Press also talked to a cabinetmaker, a sign maker and an insulation installer. These folks didn’t have comments because they hadn’t yet talked to their accountant or studied the documents from the N.C. Department of Revenue. One didn’t even know anything about the new changes.

Another said that if what he was hearing was the case, then “it was going to be very difficult and costly if we have” to charge taxes on building, installing and selling cabinets.

Michael Carpenter, general counsel for the N.C. Home Builders Association, penned a two-page letter to help members understand what was happening from a “builder’s perspective.” Carpenter said the association would have preferred no changes.

Carpenter noted that in 2013, the “NCHBA successfully opposed legislation that would have extended the sales tax to all labor performed in connection to residential construction as part of a sweeping proposal to substantially expand the sales tax to almost 200 services, which was opposed by many other groups.”

He noted that what ended up being approved last year, the levy of sales tax on repair, maintenance and installation services, arose very late in the 2015 session and that the association’s lobbyists knew that a compromise would have to be made – instead of the opposition of the entire proposal.

“When it appeared that the proposal would be included in the final budget conference report, our strategy turned to work on the language to limit the scope of the change. Our first priority was to preserve the ‘real property contractor’ exemption, which was achieved. We also successfully worked to limit expansion of the definition of ‘retailer’ to preserve the ‘retailer-contractor’ exemption. While we would have preferred no change in the law, the results were considerably more favorable than originally proposed,” Carpenter wrote.

Read the entire letter here. The “real property contractor” exemption essentially means that person or company building or remodeling a house actually owns the home and is not doing work for another person. The “retailer-contractor” exemption boils down to the contractor having to pay taxes on labor if the majority of revenue is made from retail as opposed to labor.

See this example provided by the NC Department of Revenue:

“For the 2015 calendar year, a person who sells septic tank components at retail locations solely in the State and installs septic tanks in real property solely in the State received total revenue of $5,000,000. Of the $5,000,000 in total revenue, $4,000,000 was from the retail sale of septic tank components in the State and $1,000,000 was from installation of septic tanks. Based on the 2015 calendar year, the person’s revenue is comprised 80%…from retail sales of component parts. Effective March 1, 2016, the person is deemed to be in ‘retail trade’; therefore, the person is a retailer and must treat all sales transactions as retail sales on or after March 1, 2016, no matter that prior [to that date] the business was permitted to operate as a retailer-contractor. The total sales price of installed septic tanks on or after March 1, 2016, is subject to sales tax in the same manner as the sale of any components sold at retail.”

As the News & Observer noted about the exemptions Carpenter was referring to:

“The new sales taxes are more complicated for repair, maintenance and installation services on homes and other buildings. 

Whether a service is taxed will largely depend on whether the firm performing the service is also selling materials – and therefore already collecting sales taxes.

“Thus far, it’s been a bit difficult to truly understand it,” said Jim Pendergrass, executive director of the Plumbing-Heating-Cooling Contractors Association of North Carolina. “There seems to be a lot of exemptions and a lack of clarifications.”

Sales tax requirements will be based on whether the majority of a business’ sales come from parts or equipment. That means a service – unclogging a toilet, for example – would be subject to sales tax with a company whose business is mostly sales but exempt if a customer hires someone whose business is just to provide the service.

“The law doesn’t pick up on the fact that it could create an unlevel playing field,” Pendergrass said.” 

N.C. Sen. Jonathan Jordan, a Republican who is running for re-election this year and endorses the changes, said that he’s heard grumbling from small business owners in the past few days. But, he insinuated that this issue is more of a public relations – rather than policy – problem.

“I don’t know if it was rolled out very well. Some didn’t know it was going into effect. I will find out why that’s the case from the Department of Revenue,” Jordan said.

Jordan stressed that these tax increases were part of the phasing out of the state income tax and that by allowing a one-cent sales tax increase to expire in 2011, his first year in office, taxpayers have saved $5 billions or $1 billion per year.

“It’s not going to stay this way. The plan is to phase in sales tax to take over the income tax. If everybody looks at the income tax changes, it more than makes up for any changes for sales tax increases,” Jordan said. “They need to look at the overall process and see that it’s a phase-in and a move toward a consumption tax.”

Jordan said a consumption tax would be the “fairest kind of tax” because it taxes people who choose to spend money (every one buys food, for example) and is not based on the amount of income you receive from your job.

“It’s more unfair on the income side,” Jordan said. “On the sales tax side, it’s much more fair.”

N.C. Senate Democratic Leader Dan Blue disagreed.

Days prior to the changes going into effect, Blue said that the sales tax was “nothing more than a veiled lower-to-middle income tax increase” and that income tax cuts would benefit higher income families more so than those earning lower wages.

“Car and home repairs are stressful and much more costly to lower income families that pay a higher percentage of their income towards these expenses,” Blue said. “The move to support the state’s budget with consumption taxes over income taxes is a lose/lose situation for low and middle income families in North Carolina.”

Click here to review a number of documents from the NC Department of Revenue that spans a variety of industries. Below is some info from just one of those notices from NC Department of Revenue.