Understanding NC Sales Tax: A Comprehensive Guide for Businesses

North Carolina, like many states, levies sales and use taxes. For businesses operating in or selling to customers in NC, understanding these taxes is crucial for compliance and accurate financial management. This guide provides a detailed overview of Nc Sales Tax, helping businesses navigate its complexities.

Sales Tax vs. Use Tax: Key Definitions

It’s important to distinguish between sales tax and use tax, although the terms are often used interchangeably in everyday business operations.

Sales Tax

In North Carolina, sales tax is applied to the retail sale of tangible personal property, meals, and admissions to entertainment events. Unless specifically exempted by law, these transactions are subject to both state and local sales taxes. The responsibility for collecting this tax falls on the seller, who then remits it to the state.

Use Tax

Use tax comes into play when goods or services are purchased for consumption or use within North Carolina, and sales tax was not paid at the time of purchase. This often applies to online purchases from out-of-state vendors or items brought into NC from other states where sales tax wasn’t collected. Businesses are liable for use tax on items “consumed” in their operations, again, unless specifically exempted. The buyer is responsible for remitting use tax directly to the state.

Alt text: Chart illustrating the difference between Sales Tax collected by sellers and Use Tax paid by buyers in North Carolina.

Direct Pay Permits: Simplifying Tax for Large Organizations

Large organizations in North Carolina, such as Duke University and Duke University Health System, may operate under a Direct Pay Permit. Issued by the North Carolina Department of Revenue, this permit allows these entities to purchase goods without paying sales tax at the point of sale. Instead, they directly assess and remit any applicable use tax to the state.

It’s important to note that Direct Pay Permits in North Carolina cannot be used for purchases from hotels, restaurants, and food caterers.

Duke University holds two direct pay permits:

• University Permit (#209)
• Health System Permit (#468)

Businesses interacting with large NC organizations should be aware of Direct Pay Permits and how they affect sales tax collection.

Certificate of Resale: For Businesses Selling Goods

A Certificate of Resale (Form E-590) is relevant for businesses engaged in retail sales. This certificate allows businesses to purchase goods intended for resale without paying sales tax. By providing a vendor with a Certificate of Resale, the purchasing business confirms that they will collect and remit sales tax when they sell those goods to the final consumer. This is commonly used by retailers and wholesalers but may not be applicable to most service-based businesses.

“Tax Exempt” Status: Understanding the Limitations in NC

The term “tax exempt” often causes confusion regarding state sales tax in North Carolina. While organizations might have federal tax-exempt status from the IRS, North Carolina does not automatically grant sales tax exemptions based on this federal status. In NC, “tax exempt” primarily refers to an organization’s exemption from federal income tax, not necessarily state sales tax.

In fact, organizations like Duke University and Duke University Health System, despite their non-profit status, are required by North Carolina law to collect sales tax on most of their sales revenue, similar to any other business.

However, North Carolina does offer a semiannual refund of sales/use tax paid by qualifying nonprofit organizations on purchases of tangible personal property used in their nonprofit work. This refund provides a mechanism for nonprofits to recover some of the sales tax they pay.

Special Note: Sales Tax on Alcohol Purchases

A crucial exception to sales tax refunds for tax-exempt entities in North Carolina is alcohol. Since July 1, 2006, North Carolina sales tax paid on alcoholic beverages is not refundable to tax-exempt organizations. This applies to all alcohol purchases, regardless of where they are bought (restaurants, caterers, grocery stores, etc.). Businesses and organizations should be particularly aware of this rule when budgeting and seeking tax refunds.

NC Sales Tax Collection: What Businesses Need to Collect

North Carolina law (Statute 105-164.4) mandates that businesses, including entities like Duke University and Duke University Health System, collect sales tax on a variety of transactions:

• Sales of tangible personal property: This encompasses most retail goods.
• Meals and drinks: Sales of food and beverages to customers.
• Tickets or admissions to entertainment events: Entry to sporting events, performances, movies, museums, and more.

Examples of Taxable Sales:

• Food and drink sales to students, staff, faculty, and visitors.
• Textbooks and publications.
• Souvenir and branded merchandise.
• Surplus property sales.
• Miscellaneous retail items.
• Equipment rentals to non-Duke groups.
• Merchandise sold at auctions.
• Tickets to concerts, games, and other events.

Sales Tax Exemptions:

While many items are taxable, some specific exemptions exist:

• Gift certificates.
• Prescription drugs.
• Prescription eyeglasses.

Sales Tax on Entertainment Tickets and Admissions (Effective 2014)

Since January 1, 2014, North Carolina has applied sales tax to admissions to entertainment activities. This includes:

1. Broad Range of Events:

   • Sporting events.
   • Live performances.
   • Motion pictures.
   • Museums, cultural sites, gardens, exhibits, shows, and guided tours.
   • Fundraising events open to the public.
   • Lectures sold to the public (lectures exclusively for students are considered educational and exempt).
   • Meals sold by ticket for entertainment events.

2. Included Amenities: If amenities like parking are included in the ticket price, they are not separately taxable.

3. Tax Display: Sales tax must be either separately shown on the ticket/receipt or, if included in the total price, a statement like “Sales tax included in ticket price” must be present.

4. Fees: Handling fees and convenience fees associated with ticket sales are also subject to sales tax.

5. Special Rule for 2014 Transition: For events in 2014 where ticket sales began in 2013, and at least one ticket was sold in 2013, sales tax should not be collected on any tickets sold in either 2013 or 2014.

Out-of-State Sales: When NC Sales Tax Doesn’t Apply

North Carolina sales tax is generally not applied to sales where the customer takes delivery of the goods outside of North Carolina. If a business ships goods directly to a customer in another state, NC sales tax is typically not required.

However, if a business is physically present and selling in another state (e.g., at a trade show), they may be subject to that state’s sales tax rules. In such cases, it’s essential to contact the North Carolina Corporate Tax Department prior to the event to determine potential sales tax obligations and ensure compliance with both NC and the other state’s regulations.

Accounting for Collected Sales Tax

Proper accounting for collected sales tax is critical. North Carolina provides specific guidelines for how businesses should record these transactions:

1. Retail Sales (Tangible Property): Sales of merchandise subject to NC sales tax should be recorded in General Ledger (G/L) account 346400, Sales – Merchandise Subject to NC Sales Tax. The total amount collected, including the sales tax, is recorded here. The Corporate Tax Department is then responsible for calculating and remitting the tax to the state. If a different G/L account is used, the Corporate Tax Department should be notified.

2. Sales of Tickets/Admissions (Meals & Entertainment): Revenue from taxable tickets and admissions should be recorded in G/L account 347000, Sales – Tickets/Admissions Charges. The net sales amount (excluding sales tax) is recorded here, while the sales tax collected is recorded separately in G/L account 208001, Sales Tax Accrued – Tickets/Admissions. The Corporate Tax Department handles remitting this tax.

   • Calculating Sales Tax from Gross Sales: To determine the sales tax amount from a gross sales figure (including tax), use this formula:
     • Net Sales = Gross sales (including sales tax) / 1.075 (assuming a 7.5% combined state and average local sales tax rate – this rate can vary).
     • Sales Tax = Net Sales x 0.075

3. Sales Tax Outside Home County: If retail sales subject to NC sales tax occur outside of a business’s “home county,” it’s important to notify the Corporate Tax Department. “Home counties” for Duke entities are:

   • Durham County: Duke University and Duke University Health System
   • Wake County: Duke Raleigh Hospital and Duke HomeCare and Hospice
   • Carteret County: Marine Lab

   For ticket/admission sales, the county where the event is held is considered the relevant county for sales tax purposes. County tax rates can vary, so notifying Corporate Tax helps ensure accurate tax calculation and remittance, as North Carolina requires proper allocation of sales tax to the correct county.

4. Exempt Retail Sales: Sales of merchandise that are exempt from NC sales tax should be recorded in G/L account 346600, Sales – Merchandise Exempt from NC Sales Tax. While these sales are exempt, notifying the Corporate Tax Department about the types of sales recorded in this account is still necessary for informational purposes and proper reporting.

Use Tax on Purchases: What Businesses Need to Pay

Businesses in North Carolina are not only responsible for collecting sales tax on their sales but also for paying use tax on their purchases of goods and services consumed in their operations, when sales tax has not already been paid.

Purchases Authorized by Duke University/Duke University Health System (Example for Business Policy)

For organizations like Duke, specific procedures are in place to manage use tax on purchases:

1. Purchase Orders: Duke Purchase Orders direct vendors to their Procurement Webpage for sales and use tax information. Vendors (except hotels, restaurants, and caterers) should not charge sales tax on Duke purchases. Duke self-assesses and remits any use tax due.

2. Purchases Without Purchase Orders: Departments making purchases without a PO should provide vendors (excluding hotels, restaurants, and caterers) with a copy of Duke’s direct pay permit. This again exempts Duke from sales tax at the point of purchase, and Duke handles use tax internally.

   • Invoice Processing: Invoices processed by departments should generally not include NC sales tax charges (except for alcohol, hotels, restaurants, and caterers). If sales tax is incorrectly charged (excluding alcohol tax), it can be coded to fund 100-1000 using G/L account 146000, Sales Tax Receivable, for potential recovery. Hotel occupancy tax, however, is not sales tax and is charged directly to the department’s expenses.
   • Alcohol Purchases: As sales tax on alcohol is non-refundable, departments are instructed to request separate invoices for alcohol purchases to ensure correct tax handling.
   • Petty Cash: Petty cash purchases follow similar rules. Any eligible sales tax paid (excluding alcohol tax) can be coded to fund 1001000 using G/L account 146000, Sales Tax Receivable, on the reimbursement request.

Purchases Authorized by Individuals (e.g., Employee Purchases)

When individuals within an organization make purchases, different rules may apply:

1. Duke Corporate Card Purchases: Corporate cards cite Duke’s direct pay permit number, aiming to exempt purchases from sales tax at the point of sale. However, North Carolina does not allow point-of-sale exemptions for prepared food/beverage sales or accommodations. Vendors should charge sales tax on these items.

   • Refunds: Duke can claim refunds for eligible sales/use tax paid on corporate card purchases in NC, except for alcohol. Again, separate invoices for alcohol are recommended.
   • Tax Coding: Departmental administrators are responsible for ensuring sales/use tax paid on corporate cards is correctly coded. NC sales tax (excluding alcohol) should be coded to fund 1001000 G/L account 146100 for Duke and DUHS.
   • Out-of-State Tax: Sales tax paid in other states using corporate cards should not be coded to this receivable account. Departments absorb out-of-state sales tax as part of the purchase expense.

2. Purchases Without Corporate Card: Effective January 1, 2014, Duke can seek refunds for NC sales/use tax paid by individuals using personal funds (cash or credit card) for business expenses. Reimbursed tax should be coded to G/L account 146000. Similar to corporate cards, out-of-state sales tax is not refundable and is absorbed by the department.

Sales Tax in Other States While Traveling (Limited Exemptions)

It’s important to note that NC Direct Pay Permits and general NC sales tax rules do not automatically apply in other states. However, some states offer limited sales tax exemptions to personnel from specific organizations like Duke University or Duke University Health System when traveling on official business.

1. Duke University Personnel Exemptions (Specific States): Duke University personnel may be exempt from sales tax in the following states for business travel purchases:

   • Florida, Illinois, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, Tennessee, Texas, Virginia, Wisconsin.

   To utilize these exemptions, employees must obtain the necessary sales tax exemption paperwork from the Corporate Tax Department before traveling. Refunds for sales tax paid in these states are generally not available; the exemption must be claimed at the point of purchase.

2. Duke University Health System Personnel Exemptions (Limited States): DUHS personnel have a more limited set of state exemptions:

   • Tennessee, Texas.

   DUHS personnel also need to obtain exemption paperwork from Corporate Tax before traveling and claim the exemption at the point of sale, as refunds are not typically an option.

Reporting and Remittance Requirements

North Carolina has specific reporting and remittance schedules for sales and use tax:

1. Self-Assessment: Duke self-assesses use tax on invoices and eligible procurement card purchases.

2. Tax Payment Schedule: Corporate Tax remits NC sales/use tax through prepayments by the 20th of the current month and pays the balance by the 20th of the following month.

3. Sales/Use Tax Receivable & Refunds: All eligible NC sales/use tax paid (self-assessed or paid to vendors) is initially recorded as a corporate receivable. Duke then files a semiannual refund claim with the State of North Carolina to recover these receivables. The refund claim includes details of the counties where the sales/use tax was paid, ensuring proper allocation of tax revenue.

Understanding and adhering to North Carolina sales and use tax regulations is essential for businesses operating in the state. This guide provides a starting point for navigating these rules and ensuring compliance. For detailed guidance and specific situations, consulting with a tax professional or the North Carolina Department of Revenue is always recommended.

Alt text: Official logo of the North Carolina Department of Revenue, the state agency responsible for tax administration.