Sales Tax 101 for Local Governments

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Chris McLaughlin

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I don’t write or teach much about sales taxes, because my colleagues and I here at the School of Government focus on local government issues.  Sales taxes are, for the most part, a state government issue.  The state of North Carolina receives all of the revenue from the base 4.25% sales tax and bears all of the responsibility for its collection.

That said, all 100 counties have adopted “local option” sales taxes of 2%, with some counties adopting an additional .25-.75%. As my colleague Kara Millonzi describes here, the roughly $3 billion in annual revenue from these local option sales taxes are shared between the cities and counties in which the taxable sales occurred. But even for these local option sales taxes, the collection responsibility falls entirely on the state and not the local governments.

The one sales tax issue on which I frequently get questions from local governments concerns their liability to pay or charge sales taxes on their own purchases and sales.  The N.C. Department of Revenue (the “DOR”) recently released updated guidance on this issue, along with many others, in its Sales and Use Tax Bulletin (June 2019)(the “SUTB”). This blog summarizes what local governments need to know about the SUTB and about sales taxes in general.

Sections 36 and 37 of the SUTB create different sales tax rules for different types of governments.  The federal government is exempt from paying sales taxes on its purchases and from charging sales taxes on (most of) its sales.  The North Carolina state government is exempt from paying sales taxes on (most of) its purchases but must charge sales taxes on its sales of tangible goods. Local governments must pay sales taxes on taxable purchases but may request refunds from DOR at the end of the year for most sales taxes paid. Just like the state, local governments must charge sales taxes on their own sales of tangible goods.

This table summaries these different rules:

Type of Government Purchases Sales
Federal Exempt Exempt

(if made to authorized purchasers)

North Carolina Exempt (mostly) Taxable
Counties and Municipalities Taxable

(but mostly refundable)

Taxable

As usual, the (blue) devil is in the details.  Here is more information about how sales taxes affect each type of government.

Federal:

The federal government’s exemption from North Carolina sales taxes covers any federal agency or department “whose activities are directly under federal control and whose purchases are paid for from the federal treasury.”  SUTB Sect. 36-1(A).  This definition of course includes federal departments and agencies such as the armed services, federal housing agencies, and the U.S. Postal Service.  Oddly, the exemption also covers the American Red Cross, a private non-profit corporation that is not under federal control.

The federal exemption applies only when the government agency (or the American Red Cross) pays for the transaction directly.  If the transaction is billed to an individual, sales taxes must be paid.  See SUTB Sect. 36-1(C) for more details.

Sales by the federal government are also exempt from sales taxes if they are made to “authorized purchasers.” 4 USC 107 For example, sales by the Department of Defense’s Base Exchange stores to active duty military, veterans, and a variety of other customers with connections to the military are exempt from sales taxes.

State:

Sales to N.C. state agencies other than those involving electricity, telecommunication services and a limited number of other products and services are exempt from sales taxes if they are made in connection with a valid state agency purchase order or are paid for directly by the state. SUTB Sect. 37-1(B) & SUTB Sect. 73-5(D).

Sales by state agencies of personal property, digital property, and services are subject to sales taxes.  SUTB Sect. 37-1(C).

Local:

Sales to local governments are subject to sales taxes. SUTB Sect. 37-1(A). But local governments may apply for annual refunds of sales taxes other than those paid on the purchase of electricity, natural gas, telecommunication services and certain other property and services listed in SUTB Sect. 73-4(D). The authority to obtain refunds of sales taxes covers cities, counties, water and sewer districts and authorities, airport authorities, and a variety of other regional governmental authorities listed in SUTB Sect. 73-4(E).

Special refund rules apply to two local government agencies.  School boards are eligible for refunds only from the state portion (4.25%) of the sales tax, not any additional local option sales taxes. SUTB Sect. 74-A(3). Local housing authorities are not permitted any sales tax refunds. SUTB Sect. 37-3.

Sales by local governments are also subject to sales taxes.  SUTB Sect. 37-1(C).  But note that if a local government purchases tangible property for resale, the local government is not required to pay sales taxes on its initial purchase.

Assume a city purchases recycling bins from a private company. The city plans to sell the recycling bins to its solid waste removal customers.  The city is not required to pay sales taxes on its purchase of the bins from the private company, but the city must charge sales taxes on its re-sales of the bins to its solid waste customers.

Impact on Local Occupancy Taxes:

Occupancy taxes levied by cities and counties apply to the rental of accommodations to the same extent as do sales taxes. If a particular accommodation rental is exempt from sales taxes, it is also exempt from local occupancy taxes. (See this blog post or this one for more details.)  As a result, the rules described above for federal, state, and local government liability for sales taxes also apply to local occupancy taxes.

Federal agencies, the American Red Cross, and state agencies are thus exempt from local occupancy taxes when renting accommodations so long as those accommodations are paid for directly by the federal or state government and not by individual employees.  Local governments must pay local occupancy taxes on accommodation rentals and are not permitted to obtain refunds of those taxes.  SUTB Sect. 73-4(D)(5).

Note that the sales tax exemption (and therefore the occupancy tax exemption) for the federal government does not cover private parties who make taxable sales on federal land within the state of North Carolina.  SUTB, Sect. 36-2.  This means that a privately owned hotel sited on Fort Bragg, Camp Lejeune, or another military base would be required to charge both sales taxes and occupancy taxes on its hotel room rentals.  So too would private AirBnB hosts located on federal lands.  This approach is very different from that of property taxes, which generally do not apply to privately owned business property sited on military bases and Native American reservations.  (See this blog post and this one for details.)

 

 

 

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