North Carolina law authorizes an annual refund of state and local sales and use taxes paid by counties, municipalities, and certain other governmental entities on their direct purchases of tangible personal property and services. See G.S. 105-164.14; G.S. 105-467(b). Taxes paid by contractors on building materials and fixtures may also be treated as direct purchases by a governmental unit—provided the materials become part of a building or structure that is owned or leased by the unit and used for public purposes. However, the law excludes refunds for purchases of electricity, telecommunications services, piped natural gas, video programming, prepaid meal plans, alcoholic beverages, and items related to the provision of municipal communications services.

Only certain entities are eligible for the refund, and the list is explicitly defined in statute. Eligible entities include counties, cities, consolidated city-counties, and special-purpose units such as metropolitan water and sewer districts, sanitary districts, regional solid waste authorities, public health departments, area mental health authorities, councils of government, regional planning commissions, airport and transportation authorities, soil and water conservation districts, public libraries, and regional sports and facility authorities. The law also covers joint agencies formed for fire, police, EMS, or public broadcasting; the University of North Carolina system (for purchases with contract and grant funds); the UNC Health Care System; and various entities established by local acts or other general statutes. While local school administrative units are not eligible for state tax refunds, they may claim refunds of local sales and use taxes under G.S. 105-467(b).

Refund requests must be submitted in writing to the North Carolina Department of Revenue within six months of the end of the entity’s fiscal year. Late claims—those submitted more than three years after the original due date—are permanently barred.

Although the refund mechanism is a benefit, it also creates administrative challenges. Because governmental entities must initially pay sales and use taxes and then seek reimbursement, it is critical that they follow appropriate budgeting and accounting practices to ensure compliance and transparency. This blog post addresses the legal requirements for budgeting those expenditures and handling the subsequent refunds.

Budgeting Requirement for All Monies

Counties, municipalities, and public authorities (collectively “local units”) are subject to the Local Government Budget and Fiscal Control Act (LGBFCA), which governs the receipt, budgeting, expenditure, and reporting of public funds. G.S. Chapter 159, Article 3. Under G.S. 159-8, all moneys received or expended by a local unit—regardless of source—must be included in the annual budget ordinance or a (capital, grant, or settlement) project ordinance: “No local government or public authority may expend any moneys, regardless of their source… except in accordance with a budget ordinance or project ordinance . . . .” G.S. 159-8(b).

There are only two exceptions to this budgeting inclusivity requirement: internal service funds and monies held in a true trust or custodial capacity. Id. Internal service funds involve internal charges between departments and do not represent new or external revenues. Trust and custodial funds are held by the local government on behalf of others and do not legally belong to the unit. Because the local government cannot use these funds for its own purposes, they are excluded from the budget requirement. Sales and use tax transactions do not fall under either exception—they involve the local government’s own funds and must be fully budgeted, both when paid and when reimbursed.

Budgeting the Initial Tax Expenditure

When a local unit makes a direct purchase or contracts for a project subject to sales and use tax, the annual budget ordinance (or project ordinance) must include an appropriation sufficient to cover the full cost of the expenditure—including any sales and use taxes that will be paid. In the case of an annual budget ordinance, this is typically included as part of a broader departmental or project appropriation. In a project ordinance, the tax portion may either be appropriated as part of a lump sum for the project or itemized separately.

Budgeting the Reimbursement

Eligible local units may apply annually for a refund of qualifying taxes. (See guidance from the North Carolina Department of Revenue on the submission process.) Once a refund is anticipated or received, the local unit must budget the funds properly:

• If the refund is expected during the budget year and will be spent during that year, the local unit should include it as estimated revenue under a “Sales and Use Tax Reimbursement” line item in the budget ordinance.
• If the refund was received in a prior fiscal year and reverted to fund balance, it will be budgeted as “appropriated fund balance” before being spent.

Sales and use tax refunds are unrestricted revenues. A local unit may expend the monies for any statutorily authorized purpose. The key compliance requirement is that both the initial expenditure and the reimbursement must be budgeted before funds are obligated and disbursed.