US - North Carolina Sales and Use Tax Guide

Sales and Use Tax Basics in North Carolina

Sales Tax

In North Carolina, the general state, local, and transit sales tax applies to the sale of tangible personal property except for items specifically listed as exempt. The term tangible personal property, or tangible good, is broadly defined as items that can be perceived by the senses, including electricity, water, gas, steam, and prewritten computer software.

Use Tax

When a sales tax has not been charged, collected, and remitted by the sellers, the complementary use tax becomes due. Also known as the consumer use tax, it applies when a person buys, leases, or rents items either within or outside the state for storage, use, or consumption in North Carolina, provided the required sales or use tax is not paid at the time of purchase. Similar to the sales tax, use tax applies to tangible goods, certain digital products, and taxable services.

North Carolina Sales and Use Tax Rates

The total applicable sales and use tax rates represent a combination of the statewide 4.75% rate, plus applicable local and transit rates. Local sales and use tax rates vary from one county to another, but are typically between 2% and 2.75%. Also, certain counties impose a 0.50% transit tax rate.

However, for specific items like manufactured and modular homes, aircraft, and qualified jet engines, an exemption is provided, and these items are subject only to the general 4.75% state sales and use tax rate, without any local or transit tax rates added. Also, several items are subject to 7% combined general rate, including telecommunications and ancillary services, video programming services, and electricity.

Tax-Exempt Transactions

Tax-exempt transactions in North Carolina are divided into groups, such as agricultural, motor fuels, or medical items. Additionally, specific individuals or entities, such as commercial fishermen, commercial loggers, wildlife managers, state agencies, and the US government, may be authorized to claim exemptions under specific conditions. However, these statutory exemptions are subject to regular updates.

Nexus Rules in North Carolina

Businesses engaged in sales to North Carolina, whether being physically present in the state or remotely, are liable for sales and use tax purposes there, if they meet specific requirements. Additionally, digital marketplace operators may also be required to register for, collect, and remit taxes on their own and facilitate sales under the marketplace facilitator rules.

Physical Nexus

According to the North Carolina Doing Business Rule, physical nexus is established when businesses are maintaining an office or other place of business in the state, holding inventory in the state, selling or distributing goods from a company-owned vehicle, owning, renting, or operating income-producing property, and having an employee work from another company’s office within the state.

Economic Nexus

Economic nexus is specifically designed for remote or out-of-state sellers making sales to in-state consumers. Therefore, once a remote seller’s gross sales to North Carolina consumers exceed USD 100,000 in the current or previous calendar year, including sales made as a marketplace seller or through marketplace-facilitated transactions, it must register for, collect, and remit sales tax.

Marketplace Nexus

Similar to the economic nexus, the marketplace nexus threshold is USD 100,000 in gross sales. However, it includes all marketplace-facilitated sales and any direct sales that the marketplace facilitator makes. Thus, once the threshold is exceeded, the facilitator is responsible for collecting and remitting sales and use tax on all such transactions and must follow the exact requirements and procedures as other retailers.

Taxable Goods and Services in North Carolina

Generally, sales and use tax applies to the sales price or gross receipts from taxable sales of tangible goods, certain digital products, and specified services. Regarding tangible goods, the list of taxable products includes all items not subject to a special rate, such as water, steam, and prewritten computer software. 

Additionally, any transaction relating to aircraft and qualified jet engines, aviation gasoline and jet fuel, boats, electricity, food and prepaid meal plans, manufactured and modular homes, piped natural gas, and spirituous liquor is taxable, unless strictly exempt.

While services are generally non-taxable, the list of taxable services includes admission charges, laundry and linen rental services, prepaid telephone calling services, real property contracts, accommodation rentals, repair, maintenance, and installation services, satellite digital audio radio service, service contracts, telecommunications and ancillary services, and video programming services.

Bundled Transactions and the True Object Test 

In North Carolina, sales tax applies to the sales price of bundled transactions unless certain conditions are met. For example, a bundle of tangible goods that includes exempt items, such as certain food products or medical devices, may be partially or fully exempt if the taxable portion does not exceed 50% of the total bundle price.

On the other hand, if a bundled transaction includes a service, the retailer can allocate a reasonable portion of the bundle’s price to each taxable item based on business records, and tax applies only to the allocated taxable amounts. Also, a separate 10% test allows exemption if taxable items in the bundle do not exceed 10% of the total price, provided no other exemption applies.

E-Commerce Framework

The Carolina explicitly defined that sales tax applies to items sold by mail, telephone, internet, mobile app, or other methods by a retailer when the order is received from another state and the item is delivered or made accessible to a person in North Carolina, or when the retailer performs a service in North Carolina. 

Notably, the state government underlined that it is presumed that a North Carolina resident placing an order was located in the state at the time of the order. Therefore, remote sellers that make these remote sales and exceed the economic nexus threshold must collect and remit sales tax.

Marketplace Rules

If remote sellers also offer and sell tangible goods, digital products, and services through online marketplaces, they must include those sales in calculating their economic nexus threshold. In such cases, sales through online marketplaces are relevant to both remote sellers and their economic nexus, as well as to marketplaces and their nexus.

In contrast, remote sellers may make sales solely through online marketplaces, at which point they are considered marketplace sellers. If a marketplace facilitator is collecting and remitting sales tax, then remote sellers do not have to do so for their marketplace sales. However, if the marketplace facilitators are not collecting and remitting, the marketplace seller is required to collect and remit tax on all taxable sales made to in-state consumers. 

In either case, remote sellers are responsible for collecting and remitting sales tax on any direct-to-consumer sales once they exceed USD 100,000 in gross sales.

Digital Goods and Services

The sales and use tax applies to the retail sale of specific digital property, regardless of whether the purchaser has permanent rights or ongoing access without further payments. The list of taxable digital products includes goods delivered or accessed electronically, such as digital audio works, digital audiovisual works, digital books, magazines, newspapers, newsletters, reports, photographs, and greeting cards, which are not considered tangible goods.

In this context, "delivered electronically" means that such goods may be downloaded, emailed, or transferred using a similar method. At the same time, "electronic access" generally involves online access with a password or digital code.

Digital Marketplace

Under the North Carolina legislation, any individual or business that directly or through affiliates, both lists or makes a marketplace seller’s goods or services available for sale through a marketplace they own or operate, and either collects the sales or purchase price of those items, processes payments, or provides payment processing services to purchasers for the sale of the marketplace seller’s products or services is considered a marketplace facilitator.

Digital Platform Operator

Those who meet the requirements for marketplace facilitators and exceed USD 100,000 in gross sales from their own or facilitated sales must register for sales tax in North Carolina. More precisely, those marketplace facilitators are treated as if they are engaged in business in this state and are responsible for collecting and remitting sales and use tax on marketplace-facilitated sales. Since marketplace facilitators are liable for any marketplace sales, they do not need to provide a certificate to marketplace sellers stating that they will collect and remit sales tax. 

Filing and Payment Requirements in North Carolina

Taxable persons in North Carolina receive instructions from the Secretary of Revenue, who assigns filing frequencies for various tax returns, including sales and use tax. Those with monthly tax liabilities between USD 100 and USD 20,000 are assigned a monthly filing frequency.  Quarterly tax returns are assigned to taxable persons who have total liabilities constantly under USD 100. 

Taxable persons that exceed USD 20,000 in monthly liability must file by the 20th of each month, remit taxes due for the prior month, and prepay at least 65% of next month’s liability based on the current month, same month last year, or previous year’s average monthly tax. This is known as the monthly filing with prepayment.

Penalties for Non-Compliance with Sales and Use Tax Requirements

The North Carolina Department of Revenue imposes various penalties on taxable persons who fail to comply with sales and use tax rules and regulations. For example, tax returns filed after the due date incur a failure-to-file penalty of 5% of the net tax due per month, up to a maximum of 25%, calculated from the extended filing date if an extension is granted.

Additionally, a penalty of USD 50 per day, up to a maximum of USD 1,000, is imposed on a taxable person who fails to file an informational return on time. Furthermore, a USD 200 penalty is imposed in cases when the return is not filed in the format prescribed by the Secretary of Revenue.