New Sales Tax Rules for Construction Projects in NC


In North Carolina, the General Assembly has been actively pursuing ways to decrease personal income taxes.  In order to help pay for those reductions, they have boosted sales and use tax for personal services over the past year or two.  Service and maintenance businesses had been lumped in to that group, but this year, it has expanded even further.

Color_Seal_300dpiAs of January 1st, 2017, North Carolina made certain construction projects A LOT more complicated.  NC issued new rules for sales and use tax for projects that are classified as “Repair, Maintenance and Installation” (RMI) projects.  According to the NC Department of Revenue (NCDOR), a general contractor that performs “repair, maintenance, and installation services” on or after January 1, 2017 is liable for and should collect sales or use tax on the sales price of or the gross receipts derived from repair, maintenance, and installation services.

Prior to January 1st, a general contractor would pay sales tax on materials they purchase to do the work, and would then invoice the customer without charging sales tax.  Now, for projects such as minor building repairs and cosmetic upgrades, contractors may purchase materials tax free, but will have to charge sales tax (6.75% to 7.5%) on the entire project, materials and labor included.

From the NC Department of Revenue, examples of Repair, Maintenance and Installation (RMI) projects include:

  • HVAC repair for an air conditioning or heating unit that is not working properly.
  • Rekey locks for real property by a locksmith.
  • Repair of a water pump motor.
  • Repair to correct a jammed garage door.
  • Electrical repair due to a light switch or receptacle not working properly.
  • Plumbing services to unclog a drain.
  • Plumbing services to identify and repair a leak in a pipe.
  • Services by a roofing company to identify and repair a roof leak.Money
  • Replace damaged exterior bricks.
  • Replace or repair of a storm door or garage door.
  • Repair or replace countertops.
  • Replace or reface kitchen cabinet doors.
  • Repair or replace a water heater.
  • Repair of a liner for a swimming pool.
  • Repair or replace a single light fixture.
  • Carpet or linoleum install for a single room.
  • Repair or replace single plumbing fixture (i.e. toilet or sink).
  • Replacement of plate glass window.

So, for contractors that mostly do real property improvement projects (capital improvement), the state has issued a certification form (Form E‐589CI) that should be completed for every project, and signed by the Owner, that effectively certifies that the project is NOT and RMI type of project.  This signals to everyone that NO sales tax will be collected for the project.  This will help when NCDOR comes calling for sales tax.

Some more detailed examples:

  • Example 1:  A homeowner hires a handyman service to repair an area of damaged bathroom tiles. The handyman service purchases replacement tile, grout, and sealant exempt from tax by issuing an exemption certificate to the retailer as these items are for resale and will be
    transferred to the customer’s property. The handyman is a retailer and is liable for and should collect sales tax on the total sales price of the repair, maintenance, and installation service.
  • Example 2: A homeowner hires a home improvement business to reface outdated kitchen cabinets. The project requires the home improvement business to replace the exterior cabinet doors, drawer fronts, and cabinet handles. The charge by the home improvement business to the homeowner is $2,500.00. Based on the scope of work, permits are not required to be obtained by either the homeowner or the contractor. This transaction is not a capital improvement nor considered remodeling and is, therefore, not taxed as a real property contract. Rather, the transaction is subject to sales tax as repair, maintenance, and installation services and the contractor is liable for and should collect the general State, applicable local, and applicable transit rates of sales and use tax on the sales price of $2,500.00.
  • Example 3: A homeowner hires a general contractor to convert an attic space into an additional living space. The conversion will involve the reconfiguration of the house’s truss system, the installation of a dormer window, additional plumbing, electrical wiring, framing, and new insulation. The general contractor will secure the applicable permits required by the State Building Code and all work will be inspected by the appropriate local government inspections department. The transaction is a real property contract for new construction with respect to a capital improvement and subject to sales and use tax as a real property contract. The general contractor, as real property contractor, is liable for sales and use tax on the purchase price of all tangible personal property (building materials, etc.) to fulfill the real property contract. The general contractor must issue Form E‐589CI, Affidavit of Capital Improvement, to any subcontractor that is hired to perform any portion of the real property contract, provided a “blanket” Affidavit of Capital Improvement is not already on file with the subcontractor issued from the general contractor. If a subcontractor is not hired to perform any portion of the conversion, no Form E‐589CI is required to be issued or completed by the general contractor.
  • Example 4: A homeowner decides to update the homeowner’s kitchen. The activities include the following: installation of new kitchen cabinets including cabinet boxes, tile, flooring, interior walls painted, and a new sink. Upon completion, the appearance of the room is substantially different. The transaction is remodeling.

As always, there will be some gray areas.  It will take some time for general contractors and customers alike to get used to the new rules.

In North Carolina’s continuing effort to shift the tax burden, they have tried to simplify the rules, but have introduced many levels of complexity to businesses and customers that are not accustomed to dealing with sales tax.  Granted, the majority of typical design-build projects will not be affected.  However, the process of determining compliance is placed squarely on the contractor.

For some more information, check out the following:



  1. Colleen McGuire /Reply

    An individual has a wheelchair lift installed in the home as a medical necessity. It is my understanding that the materials (the lift, platform, switches, etc.) are subject to NC sales tax and are passed along to be paid by the homeowner. However, the labor to install this capital improvement to the home is NOT subject to sales tax. Is that a correct interpretation?

    1. eddie /Reply

      While I am not a tax professional, that is my understanding, assuming this is not replacing an existing wheelchair lift.

    2. Allen Clark /Reply

      I am extending the deck on the back and installing a swim spa. The total cost is roughly 80k. This would be capital improvements correct?

      Also they stated they are not subcontracting anything but I still got a e-589ci.

      My first time really doing anything of this magnitude and wanted to get some feedback. Thanks.

      1. eddie /Reply

        Assuming your contractor is obtaining building permits for this work (permits are certainly required), then this would qualify as a capital improvement project and exempt from sales tax. Your contractor sent you an E-589CI form so that you can confirm that this is a capital improvement project. It doesn’t matter if he is subcontracting this project out.

  2. Roofer Southland /Reply

    I was looking for this information relating to new sales tax rules construction projects nc. You have really eased my work, loved your writing skill as well. Please keep sharing more!

  3. G. Braga /Reply

    I was looking for information regarding the tax regulations for commercial cabinet making.
    I think I have to pay the tax for materials but I dont have to collect any/

    1. eddie /Reply

      Yes, you will pay tax on materials. You should charge sales tax when you sell the cabinets unless your cabinets are going into a capital improvement project. Most of the time, that would be the case, I assume. However, if you are simply replacing the kitchen cabinets for a customer, you should charge sales tax.

  4. John Helms /Reply

    I’m having new replacement windows installed in my home. All 27 are vinyl replacement windows.

    Should the contractor charge me sales tax on this project?

      1. Valen /Reply

        If 27 windows are being replaced at $400 per window materials only. Labor is additional. The window supplies alone are $10,800. Contractor markup on the windows is $10,800 x 15% equalling $1,620. Labor might be an additional $350 per window totalling $9,450. The total pre tax cost for the depreciable capital improvement project is $21,870.
        1) should the contractor treat this entire project (including supplies & labor) as a homeowner’s personal income tax depreciable capital improvement project?? This is rational since the capital improvement increases the value of the real property upon completion, therefore, it is also to be depreciated over 3 or 5 years on the tax return of the home owner??? This spreads the tax shelter value (offsets income thereby lessenning tax due) of the capital improvement typically over 3 or 5 years for tax purposes.
        2) Or should the contractor treat this as a RMI?? In this scenario, the contractor would be exempt of sales tax at the retailer & would pass the taxes to the homeowner due upon project completion. Labor would not be taxed if treated as an RMI??
        3) if a capital improvement is labor taxed to and paid by end user/homeowner?
        4) if RMI is labor taxed to and paid by homeowner/end user?
        5) I am thoroughly confused. It seems to me that a decision must be made as to whether this is a capital improvement or RMI. Next step in decision tree is to know if labor and (separately) materials are taxed at retailer and paid by contractor. Or is tax burden passed on and taxed to end user when the contractor sells them to the house holder? Thanks. Sheweee

        1. eddie /Reply

          I must refer you to the NC Department of Revenue content:

          Real Property defined:

          When in doubt, consult a tax professional or an attorney.

    1. eddie /Reply

      Complete replacement of a driveway is exempt from sales tax. Repairs of portions of a driveway are taxable.

  5. Payman Nia /Reply

    I’m also having new replacement windows installed along with new roof,new plumbing, electrical upgrades and interior remodel.of an investment property duplex. GC is pulling remodel permits as well so new windows still wouldn’t be considered real property improvement?

    1. eddie /Reply

      If a permit is being issued, then it is a capital improvement and sales tax should not be charged. See

    1. eddie /Reply

      It depends. If a permit is being issued for the work, then it is considered a capital improvement. See

  6. Kat S /Reply

    If I am having all of the shingles, boots, and some flashing on my roof replaced, will I have to pay sales tax on that?

  7. Christopher Wright /Reply

    What would the rule be on installing a walk in tub. This would be removal of an old tub or shower and installing a new unit.

    1. eddie /Reply

      Replacement of an existing tub with a new tub would be subject to sales tax in NC, according to the NC Department of Revenue.

  8. David /Reply

    So, for capital improvement, we pay tax when we buy it but don’t charge tax when we sell it. Correct? Are there any scenarios where you can purchase materials and do the work tax free? Or, is it always that you are either paying tax on purchase or charging tax on sale?

    1. eddie /Reply

      For capital improvement projects, you would typically pay tax on materials that you purchase, but not charge tax on the labor and materials you provide to the customer. I cannot think of an instance where you would not pay tax on purchases and also not charge tax on sales. Again, I am not a tax professional, so this is just my opinion.

    1. eddie /Reply

      I don’t believe replacing vinyl siding is exempt from sales tax since it is a repair items and a permit is not usually required. Best to check with a tax specialist.

  9. Michael Sudyk /Reply

    I do cabinet refinishing and refacing. We collect sales tax if we are the only project the homeowner is doing. If they are also doing countertops, appliances or floors I give them a 589 and don’t collect tax.
    I was told by NCDOR that if the home owner is doing more than one type of improvement in a room it’s a Capital Improvement.
    Does this sound right? Very confusing to try and explain to customers.
    Thanks for the thread!

    1. eddie /Reply

      Yes, that sounds right. One of the best references available from NCDOR explains this comprehensively:

  10. Aly /Reply

    A customer is having me replace an existing interior door with a wider door. Questioning why I am charging sales tax and is referencing subtitle 75-3 as his reasoning that I should not be charging sales tax on this remodel.
    Is my customer correct?

    1. eddie /Reply

      While I am not an accountant or a tax professional, I can understand how this example would be viewed as a gray area. I don’t see anything in 75-3 that would specifically exempt this work from sales tax. If simply replacing the door (like for like), that would certainly be subject to sales tax. Painting of the door would be exempt. The question is whether the act of enlarging the door is a capital improvement project and thereby exempt from sales tax. Personally, I ask myself this question: “Is a permit required to do this work?” If so, capital improvement. If not, it is a repair.

    2. Mel Torres /Reply

      If a contractor is doing a new house build, should the design fee he subcontracted for the build be taxed to the contractor or is design build plans tax exempt for new build to him?

  11. Andrew Jacobs /Reply

    Are we correct by adding taxes for our profit / mark up listed on our work order quotes to potential customers and or change order quotes to existing construction contracts?
    I previously read the NCDOR589 Tax Law in 2018 and it stated, “all Construction Contractors’ materials, services and fees are subject to local county and NC sales tax”
    Profit / Mark Up is legally defined as a Fee.
    I am trying to relocate that documentation as a reference and justification and need to know where I can find it.?

    1. eddie /Reply

      I believe you are correct that profit/mark-up is taxable per the law, but cannot provide the exact reference. It is implied in the examples given in the guidance documents published by NC. Your best course is to consult a tax professional.

    1. eddie /Reply

      While I am not a tax professional, I believe it depends on whether you are installing gutters for a new house, or replacing gutters on an existing house. If installing on a new house, I believe that would constitute a Capital Improvement and be exempt from sales tax. However, if replacing gutters, that will require you to charge sales tax. The amount of sales tax varies from County to County.

  12. Daniel Byler /Reply

    I’m Building my own garage and addition. Can I purchase my materials tax exempt by providing my vendors with a form e589CI?

    1. eddie /Reply

      As I understand it, you would still pay sales tax on materials purchased to construct your capital improvement project. “A retailer engaged in business in the State shall collect tax on the sales price of the tangible personal property, digital property, or service sold at retail to a real property contractor unless a statutory exemption in [N.C. Gen Stat. §] 105-164.13 or [N.C. Gen Stat. §] 105-164.13E applies.”

  13. Chris /Reply

    I am building a house and my general contractor is hiring a subcontractor to do the kitchen installation and all other cabinetry in the house. Should my builder issue a e589CI to the subcontractor to exempt this part of the real property contract from sales tax?

    1. eddie /Reply

      Correct. You need to issue your contractor an affidavit that this is a capital improvement project. Then, he can do the same with his subcontractors. At least, that is my understanding.

    1. eddie /Reply

      According to the state of NC, “The addition, replacement or change in the design of air where a permit is required under the NC State Building Code” is not taxable. Technically, such work requires a permit. As such, the work is not taxable. As long as the contractor pulls permits for the work, the replacement is not taxable. However, if no permits are pulled (i.e. if they are not required), then the work is taxable.

  14. Shawn Johnson /Reply

    I am a contractor subbing out a roofer and carpenter and painter to fix the roof and rotten wood around the screen porch as well as pressure washing the entire soffit, eaves and gutters, and repainting the entire facia, freeze and soffit.

    My roofer is charging me taxes on labor and material,
    my carpenter and painter are not.

    I will have a company mark up on all work.

    Do I charge tax if the roofing company is already charging tax?

    Do I charge tax on the painter?

    I am assuming I am charging tax on the Carpenter’s labor but not the material because the materials are already being taxed by the supplier.

    Confused, Shawn

    1. eddie /Reply

      Painting is one of the services exempted from sales tax, so no sales tax there. If this work doesn’t require a permit, this project is not a capital improvement project, so you must charge sales tax to your customer. As I understand it, you must charge sales tax on whatever you provide that was not already taxed. Consult a tax attorney, however. This is just an opinion, not tax advice.

  15. Nick F. /Reply

    Eddie, thank you so much for taking the time to help us on the tax exemption matter. I have 2 situation that need your help as a new spec home builder. – I build new homes, list them on MLS and have them sold.
    1) For my subcontractors including HVAC sub or countertop sub that provide material and labor, I should not be billed with a sales tax on the invoices from them, right? Must I issue Form E‐589CI, Affidavit of Capital Improvement, to all my subcontractors?
    2) If I purchase appliances from Ferguson (or Home Depot) and they don’t install the appliances, do I pay them sales tax for the new homes I am building?

    Thank you so much!


    1. eddie /Reply

      Not sure about that one. A manufactured home is more of a product, not a capital expenditure. Best consult a tax attorney.

  16. Julie /Reply

    if someone purchases a building and wants to put up new signs to identify the business is the installation on the new sign taxable?

    1. eddie /Reply

      Since we do not do sign work, I don’t know for sure. If I had to guess, I would say yes as that may not be considered a capital improvement.

  17. Mike /Reply

    I signed a contract for work to be done on a complete bathroom remodel. The bathroom was taken down to the studs and subfloor. The signed contract included a 4.75% tax in North Carolina. The remodel is now complete and the final invoice has been changed to a tax rate of 5%. This change in percentage made me question the tax in its entirety. I am now under the impression that due to this being a remodel, no tax should be paid. The contractor provided both labor and supplies. I purchased many of the finish materials used and paid tax on them i.e. tile, plumbing fixtures, cabinets, lighting, etc. Your help is appreciated to clairify if my assumption is correct.

    1. eddie /Reply

      If a building permit was obtained, then this project would be considered a Capital Improvement Project and not subject to sales tax. However, if no permit was obtained, then sales tax may be applicable. Sales tax is charged at a rate of 4.75% PLUS whatever tax is charged by the County in which the work was performed. There are ZERO counties where the total tax would be only 5%.

  18. Michaela /Reply

    When it comes to full roof replacements, is the total job taxable or does sales and use tax only apply to materials?

    1. eddie /Reply

      According to the North Carolina guidelines, a roof replacement is a capital improvement project and should be exempt from sales tax.

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