Technically, they are called contractors. But you and I know them as the people who fix, repair and remodel stuff for us. They are the electricians, plumbers, painters, carpenters, and other folks, who make sure things are like they should be around our homes and businesses.
I know these folks. I primarily worked with business taxes during my thirty years with the N.C. Dept. of Revenue. So I got to know many a contractor along the way. And I learned two things. First, they didn’t enjoy paying taxes. (But, who does?) Second, they hate doing, what they feel is, unnecessary paperwork. (But, again, who does?)
Well, thanks to the Republican legislature in Raleigh, now many of those contractors will have to deal with more of those two thing they don’t enjoy. Effective January 1, 2017, the Repair, Maintenance and Installation Service Tax for Real Property now requires many service contractors to start collecting a 6.75% sales tax on their labor. This is a big change, especially for the smaller contractor. There has always been sales tax on the materials they use. But there was no sales tax on their labor. The contractor would pay the sales tax on the materials they used when they purchased them at the building, plumbing or electrical supply house. If they did not mark up the cost of those materials, they would not be required to collect any additional sales tax. This kept the cost down to the consumer and helped the small contractor avoid paperwork. That has changed.
Which contractors are required to start collecting sales tax on their labor? Well, it’s complicated, and apparently depends on who had the better lobbyist in Raleigh. As Jim Pendergrass of the Plumbing-Heating-Cooling Contractors Assoc. stated when the act was being crafted, “We saw some specific industry areas that all of a sudden, they’re not subject to this, and it seems strange. Their lobbyist talked to a different person than mine did.”
Not surprisingly, the big contractors will be the ones least affected by the law, although they will be required to do more paperwork. (There’s always more paperwork.) The law was written so that no service tax is required from major remodeling projects that require a building permit.
What does that mean? This is where it gets absurd. The labor of electricians, plumbers, carpenters are among those affected by the act. Not so, for painters, landscapers, and those who do pressure washing. The guy that climbs up on your roof to replace a few shingles damaged by a storm is now required to charge you sales tax on his labor. But, if you replace the whole roof, the contractor won’t have to charge you sales tax on their labor. Sales tax on labor will be required if a carpenter replaces some damaged siding on your house. But if he puts new siding on the whole house, none is required.
Here is the prime example how absurd this law is, and how glad I am to be retired from the Revenue Dept. Sales tax may be required on the labor from the cost of a hand car wash. Yes, now the state could get sales tax from those guys down at the corner car wash. But there will still be no sales tax charged at the automatic car wash up the road. The robots at the automatic car wash must have a better lobbyist in Raleigh than our friends down on the corner.
It’s interesting that politicians are always saying that small business is the backbone of the American economy. But I wonder if they really believe it, or care. Democrats in Washington pushed through the Affordable Care Act, or Obamacare, in order to please their Progressive and special interests groups. This has driven up health insurance premiums through the roof for many of those small businessmen, who can’t be a part of a large group insurance policy. Now, the Republican legislature in Raleigh, in order to satisfy lobbyists and keep the tax rate low on corporations, has essentially raised taxes on these small contractors, and have made their bookkeeping even more burdensome.
So, what will happen? The Dept. of Revenue has already issued three different directives on the confusing act, each sort of clarifying the previous one. So things may change again. But if they don’t, the cost of getting things worked on around your house will probably go up. Any cost increases eventually get passed to the consumer.
Small contractors dislike paying taxes and doing burdensome paperwork. (As we all do.) They dislike it when they feel like they are being treated unfairly by the government. (As we all do.) They work hard and are smart. They may not have the right lobbyist in Raleigh, but they will figure out a way to survive in today’s economy. And, in the end, the politicians in Raleigh might not get as much revenue from these folks as they expect. Like I said, I know these folks.