North Carolina Sales and Use Tax & Audit Guide
This guide is for businesses that need straightforward answers on the following North Carolina Sales and Use Tax subjects:
- Am I required to collect and remit North Carolina sales tax?
- Should I be paying and/or collecting North Carolina use tax?
- I collected North Carolina sales tax but did not remit it, what should I do?
- I received an audit or other North Carolina sales tax assessment related notice, what should I do?
- How can I challenge or fight a sales tax assessment in North Carolina?
Who Needs to Collect North Carolina Sales and Use Tax?
Like most states, to be subject to North Carolina sales tax collection and its rules, your business must:
- Have nexus with North Carolina, and
- Sell or use something that is subject to North Carolina sales tax.
How Is Nexus Established in North Carolina?
According to the North Carolina Department of Revenue (NCDOR), sales tax nexus is created in North Carolina if a business has a physical presence in North Carolina, such as:
- Maintaining, occupying, or using an office, distribution center, warehouse, or physical location where business is conducted.
- Having independent sales reps, employees, or agents conducting business in the state, including selling, delivering, or taking orders for taxable items in North Carolina.
- Maintaining tangible personal property or digital property in North Carolina
- Assembling, installing, servicing, or repairing products in North Carolina.
- Owning, renting, or leasing real property or tangible personal property in North Carolina, including a computer server or software to solicit orders for taxable items.
- Delivering goods to North Carolina customers using your company-owned or leased truck.
- Maintaining inventory in North Carolina using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).
- North Carolina also recognizes click through nexus and affiliate nexus
Additionally, business that do not have a physical presence in North Carolina, can establish economic nexus by exceeding a certain annual sales threshold in the state. See the next section for details.
Economic Nexus (Wayfair Law) and Internet Sales in North Carolina
Effective November 1, 2018, North Carolina requires that an out of state business (a.k.a. remote seller) register with the NCDOR to collect and remit sales and use tax if the business has made either:
- gross sales of $100,000 into North Carolina in the previous or current calendar year, OR
- 200 or more transactions into North Carolina in the previous or current calendar year.
Gross sales and transaction count should be calculated using the following:
- Gross revenue from all taxable and nontaxable sales of tangible personal property, digital property, and services in North Carolina.
- Any separately stated handling, transportation, installation, and other similar fees collected by the seller in connection with the sale.
- All sales for resale, exempt sales, nontaxable sales, and marketplace-facilitated sales.
- The number of transactions for all sales channels are combined to determine the number of transactions.
North Carolina provides the following example to assist with calculating gross sales for the threshold requirement:
Company A has gross sales of $400,000 (400 transactions) sourced to North Carolina for the calendar year that consist of the following:
- $220,000 (220 transactions) in sales to wholesalers providing certificates of exemption for sales for resale.
- $75,000 (75 transactions) in sales to purchasers providing certificates of exemption for purposes other than resale (use in manufacturing, sales to exempt entities).
- $10,000 (10 transactions) in sales that qualify for an exemption from sales and use tax.
- $95,000 (95 transactions) in taxable sales to purchasers.
Company A is engaged in business in North Carolina since it has $400,000 (400 transactions) in gross sales sourced to North Carolina.
North Carolina Sales Made Through Marketplace Providers
If your business sells on Amazon or a similar marketplace facilitator / provider, you may not have to collect sales and use tax on those sales. Specifically, North Carolina requires marketplace facilitators that make sales on behalf of sellers, and that meet the nexus threshold, to collect and remit the sales and use tax on all such sales. However, such sales do count towards your business’s total sales threshold in North Carolina, which may require you to collect tax on sales made directly through your website or other marketplaces.
Which Sales Are Subject to North Carolina Sales Tax?
If you have nexus in North Carolina, the next step is to determine whether the products or services you sell are subject to North Carolina sales and use tax. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to North Carolina sales tax.
While the general rules seem straightforward, the application of North Carolina’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.
Common exemptions from North Carolina sales and use tax:
- Groceries (partial)
- Common household remedies
- Many items used in farming or manufacturers
Generally, services are not subject to North Carolina sales tax. However, the types of services listed here are subject to North Carolina sales tax:
- Dry Cleaning & Laundry Services
- Telecommunications and ancillary services
- Prepaid telephone calling services
- Video Programming Service
- Satellite Digital Audio Radio Service
- Admission Charges to an Entertainment Activity
- Service Contracts
While SaaS and custom software is not taxable in North Carolina, Prewritten software is. Additionally, the state does impose its sales tax on certain digital property sold at retail, such as:
- Digital audio work,
- Digital audiovisual work,
- Digital books,
- Magazines, newspapers, newsletters, or other publication,
- Greeting cards.
Shipping & Handling
In North Carolina, all shipping and handling or delivery charges imposed by the retailer in connection to a taxable sale is also taxable.
While the general sales tax rules seem straightforward, the application of those rules can get tricky when gray areas come up. These guides were developed by the North Carolina Department of Revenue to provide some industry specific guidance.
- North Carolina Sales Tax Guide for Admissions Charges
- North Carolina Sales Tax Guide for Aircraft and Jet Engines
- North Carolina Sales Tax Guide for Aviation Gasoline and Jet Fuel
- North Carolina Sales Tax Guide for Boats
- North Carolina Sales Tax Guide for Digital Property
- North Carolina Sales Tax Guide for Dry Cleaners
- North Carolina Sales Tax Exemptions Guide
- North Carolina Sales Tax Guide for Prepaid Meal Plans and certain foods
- North Carolina Sales Tax Guide for Lease or Rental of Property
- North Carolina Sales Tax Guide for the Rental of Accommodations such as Airbnb or VRBO
- North Carolina Sales Tax Guide for Repair, Maintenance, and Installation Services
- North Carolina Sales Tax Guide for Service Contracts
- North Carolina Sales Tax Guide for Liquor and Spirits
- North Carolina Sales Tax Guide for Remote Sales (out of state sales)
- North Carolina Sales Tax Guide for Telecommunication Services
- North Carolina Use Tax Guide
- North Carolina Sales Tax Guide for Video Programming
Determining Local Sales and Use Tax Rates in North Carolina
North Carolina’s base or statewide sales tax rate is 4.75%. However, local taxing jurisdictions (cities, counties, transit authorities) can charge a local surtax on top of the 4.75%, potentially increasing the total sales tax that must be collected and remitted by the seller. Local surtaxes are remitted to the state as part of the North Carolina sales and use tax return.
Determining exactly how much tax to collect on a transaction gets really convoluted, but the basic rules are:
- If a sale is taxable in North Carolina, then the base tax rate of 4.75% must be charged as well as the local sales and use tax for the jurisdictions where you are engaged in business.
- Generally, local sales tax is based on the location of the seller’s place of business. Local use tax is based on the location where the customer receives the goods or services. If you ship or deliver goods to your customers, you may have to collect local sales tax, local use tax or both.
List of Local Sales and Use Tax Rates in North Carolina
The combined North Carolina state + local sales and use tax rates for the largest 30 cities are listed below. A comprehensive list can be found here.
I Should Have Collected North Carolina Sales Tax, But I Didn’t
Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.
If you determine your business has nexus but you have not collected North Carolina sales tax, the primary options are to:
- Register and pay back taxes, penalties, and interest, or
- Complete a VDA to eliminate penalties (and in some cases reduce your tax liability and avoid interest).
Here is what you need to know about each option to make the best decision for your business:
Option 1: Register to Pay Back Taxes, Penalties, and Interest
Sometimes the best solution for a business is simply to register with North Carolina and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.
When to consider registration and payment:
- If you established nexus less than 3 years ago.
- The sales tax penalty is LESS than the professional fees charged for the VDA.
- Your business does NOT have a sales tax collected issue.
Beware: registering does not generally eliminate past liabilities
Option 2: Voluntary Disclosure Agreement (VDA)
North Carolina’s lookback period: 3 years.
In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 3-4 years. As a result, the benefit of doing a VDA often turns on:
- Whether the VDA limits lookback period. i.e. – you established nexus more than 3 or 4 years ago.
- The sales tax penalty savings is MORE than the professional fees charged for the VDA.
- You have a sales tax collected but not remitted issue.
I Received a North Carolina Sales and Use Tax Audit Notice, What Should I Do?
North Carolina regularly audits businesses that are required to charge, collect, and remit various taxes in the state. Businesses that receive a sales and use tax audit notice should consider the following:
- Unless you have experience handling North Carolina sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
- How will you know when to provide documents or when to push back?
- Do you have a thorough understanding of your sales and use tax areas of exposure?
- Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?
If you are unsure of the answer to these questions and you do not have experience handling North Carolina sales tax audits, hiring a professional might be right for you. Contact us and learn how our sales tax professionals can give you the peace-of-mind and confidence you need during your audit.
Please visit our resource pages for more detailed information and to help you evaluate critical decisions during your North Carolina sales and use tax audit.
- The Audit Overview & Selection Process
- The General Audit Process
- Statute of Limitations Extensions & Issues
- Managing the Sales Tax Auditor
North Carolina Sales Tax Audit Process
The audit process usually follows the process laid out in this flowchart. See the detailed guidance for each stage of the process in the sections below.
What to Expect After You Receive a North Carolina Sales and Use Tax Audit Notice (North Carolina Routine Audit Letter)
Many audits begin with a call out of the blue from a North Carolina Department of Revenue’s sales tax auditor. Shortly after the call, your business will receive an audit notice which confirms that you were lucky enough to be chosen for a North Carolina sales and use tax audit. To prepare for the audit, it is likely a good idea to start by getting a state and local tax professional involved.
What to Expect From A North Carolina Sales Tax Auditor
- Auditor will conduct pre audit research.
- Auditor will often schedule and perform an entrance conference.
- Records will be requested (many of which the auditor is not entitled to and does not need).
What to Expect During The Audit
- Once the necessary records are received, the auditor will:
- Conduct the audit by comparing your North Carolina sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your North Carolina sales tax return(s).
NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.
- Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.
- Conduct a use tax audit – the auditor will request a detail of certain documents / accounts to make sure use tax was properly paid on applicable purchases. Common areas audited include:
- Advertising Expense
- Auto & Truck Expense
- Repair and Maintenance
- Rent (including related party rent)
- Office Expense
- Miscellaneous Expense
Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to North Carolina. This often leads to shocking results for the unsuspecting taxpayer during an audit.
After the Audit – Understand and Defend Your Businesses Rights
Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding workpapers to support the North Carolina sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied North Carolina’ sales tax laws.
We recommend businesses refrain from agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their North Carolina sales tax liability.
The process of challenging a North Carolina sales tax audit assessment is discussed in detail in the following sections.
North Carolina Sales Tax Audit Protest Process Flow Chart
NOTE: If the deadlines are missed, you have a short period of time to pay the tax and seek a refund. If that deadlines is also missed, it can be very difficult to get case reopened.
Contesting Audit Findings with the Auditor
After an audit, the auditor will issue a North Carolina Notification of Audit Results (AKA the audit report). This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:
- Auditee has 30 days to contest findings with the auditor.
- Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
- Legal interpretations of sales tax law are often not resolvable at this stage.
- If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue with the North Carolina Department of Revenue.
Objection and Request for Departmental Review with the North Carolina Department of Revenue
Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed by the auditee. This is done by filing an Objection and Request for Departmental Review after the NCDOR issues the Notice of Proposed Assessment.
- A protest / appeal must be submitted within 45 days of the Notice of Proposed Assessment issuance.
- If you miss the 45 days, in some cases you have may have additional time to pay the tax and file a refund claim.
- If both periods are missed, the assessment becomes final, and it is very difficult to reopen the audit.
If you have received a Notification of Audit Results or Notice of Proposed Assessment and have not at least talked to someone experienced in North Carolina State and Local tax, now is the time before these deadlines are missed.
Notice of Final Determination (NOFD)
If you cannot resolve the North Carolina sales and use tax dispute through the protest / appeal process, the North Carolina Department of Revenue will issue a Notice of Final Determination. The NOFD gives you the opportunity to re-protest the assessment within the agency or file in North Carolina’s tax / administrative court, which is called the North Carolina Office of Administrative Hearings. There are important deadlines in this phase of the process as well, such as 60 days to file in administrative court.
Settling a North Carolina Sales Tax Liability
Along the way, or even after one the critical notices are issued, there is the possibility to settle your North Carolina sales tax case by negotiating with the North Carolina Department of Revenue. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced North Carolina state and local tax lawyer or other professional.
Contest a North Carolina Jeopardy Assessment
North Carolina may issue a Notice of Jeopardy Determination in certain situations. The jeopardy assessment gives North Carolina Department of Revenue accelerated rights and it may immediately begin to try and collect. Due to the jeopardy nature, the taxpayer only has 20 days to contest the assessment and must place a security deposit to fight the issue.
North Carolina Administrative Court
If you cannot resolve the case within the agency or missed your deadlines, you still have one last shot to fight your North Carolina sales tax assessment by going to the North Carolina State Office of Administrative Hearings (SOAH). Although we generally don’t recommend it, you always have the option to skip the agency protest process and file in administrative court. That said, because neither party wants to spend the time and resources on the uncertainty of administrative court, continuing to challenge the assessment is often an effective way to maximize your settlement potential.
If your case is filed in administrative court, and the case proceeds to hearing, it is heard and decided by a neutral administrative law judge. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.
Other North Carolina Sales Tax Resources
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