A BILL TO BE ENTITLED
AN ACT to repeal the service tax and to make various conforming changes necessary to effectuate the repeal.
The General Assembly of North Carolina enacts:

PART I. REPEAL OF SERVICE TAX AND ATTENDANT CONFORMING CHANGES
SECTION 1.(a)  G.S. 105‑164.4 reads as rewritten:
"§ 105‑164.4.  Tax imposed on retailers and certain facilitators.
(a)	A privilege tax is imposed on a retailer engaged in business in the State at the percentage rates of the retailer's net taxable sales or gross receipts, listed in this subsection. The general rate of tax is four and three‑quarters percent (4.75%). The percentage rates are as follows:
(1)	The general rate of tax applies to the following items sold at retail:
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SECTION 1.(b)  G.S. 105‑164.4B reads as rewritten:
"§ 105‑164.4B.  Sourcing principles.
(a)	General Principles. – The following principles apply in determining where to source the sale of an item for the seller's purpose and do not alter the application of the tax imposed under G.S. 105‑164.6. These principles apply regardless of the nature of the item, except as otherwise noted in this section:
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(i)	Computer Software Renewal. – The gross receipts derived from the renewal of a service contract for prewritten software is generally sourced where the purchaser can potentially first make use of the prewritten software. However, sourcing the renewal to an address where the purchaser received the underlying prewritten software does not constitute bad faith provided the seller has not received information from the purchaser that indicates a change in the location of the underlying software."
SECTION 1.(c)  G.S. 105‑164.4D reads as rewritten:
"§ 105‑164.4D.  Bundled transactions.
(a)	Tax Application. – Tax applies to the sales price of a bundled transaction unless one of the following applies:
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(b)	Determining Threshold. – A retailer of a bundled transaction subject to this section may use either the retailer's purchase price or the retailer's sales price to determine if the transaction meets the fifty percent (50%) test or the ten percent (10%) test set out in subdivisions (a)(1) and (a)(3) of this section. A retailer may not use a combination of purchase price and sales price to make this determination."
SECTION 1.(d)  G.S. 105‑164.4H reads as rewritten:
"§ 105‑164.4H.  Real property contract.
(a)	Applicability. – A real property contractor is the consumer of the tangible personal property or certain digital property that the real property contractor purchases, installs, or applies for others to fulfill a real property contract and that becomes part of real property or used to fulfill the contract. A retailer engaged in business in the State shall collect tax on the sales price of an item sold at retail to a real property contractor unless a statutory exemption in G.S. 105‑164.13 or G.S. 105‑164.13E applies. Where a real property contractor purchases tangible personal property or certain digital property for storage, use, or consumption in this State, and the tax due is not paid at the time of purchase, the provisions of G.S. 105‑164.6 apply except as provided in subsection (b) of this section.
(a1)	Substantiation. – A person may substantiate that a transaction is subject to tax as a real property contract in accordance with subsection (a) of this section by records that establish the transaction is a real property contract or by receipt of an affidavit of capital improvement. The receipt of an affidavit of capital improvement, absent fraud or other egregious activities, establishes that the subcontractor or other person receiving the affidavit should treat the transaction as a capital improvement, and the transaction is subject to tax in accordance with subsection (a) of this section. A person that issues an affidavit of capital improvement is liable for any additional tax due on the transaction, in excess of tax paid on related purchases under subsection (a) of this section, if it is determined that the transaction is not a capital improvement but rather the transaction is subject to tax as a retail sale. A person who receives an affidavit of capital improvement from another person, absent fraud or other egregious activities, is not liable for any additional tax on the gross receipts from the transaction if it is determined that the transaction is not a capital improvement.
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SECTION 1.(e)  G.S. 105‑164.4I is repealed.
SECTION 1.(f)  G.S. 105‑164.4J reads as rewritten:
"§ 105‑164.4J.  Marketplace‑facilitated sales.
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(i)	Limitation. – This section does not apply to an accommodation facilitator or an admission facilitator whose collection and remittance requirements are set out in G.S. 105‑164.4F and G.S. 105‑164.4G, respectively.
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SECTION 1.(g)  G.S. 105‑164.4K reads as rewritten:
"§ 105‑164.4K.  Property management contracts.

	

	

(d)	Real Property Management Services. – A real property manager is the consumer of the items that the real property manager purchases, installs, applies, or otherwise uses to fulfill a property management contract. A retailer engaged in business in the State shall collect tax on the sales price of an item sold at retail to a real property manager unless a statutory exemption in G.S. 105‑164.13 applies.
	
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SECTION 1.(h)  G.S. 105‑164.6 reads as rewritten:
"§ 105‑164.6.  Complementary use tax.
(a)	Tax. – An excise tax at the applicable rate and maximum tax, if any, set in G.S. 105‑164.4 is imposed on the following items if the item is subject to tax under G.S. 105‑164.4:
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SECTION 1.(i)  G.S. 105‑164.11A reads as rewritten:
"§ 105‑164.11A.  Refund of tax paid on rescinded sale or cancellation of service.
(a)	Refund. – A retailer is allowed a refund of sales tax remitted on a rescinded sale. A sale is rescinded when the purchaser returns an item to the retailer and receives a refund, in whole or in part, of the sales price paid, including a refund of the pro rata amount of the sales tax based on the taxable amount of the sales price refunded. A retailer entitled to a refund under this section may reduce taxable receipts by the taxable amount of the refund for the period in which the refund occurs or may request a refund of an overpayment as provided in G.S. 105‑241.7, provided the tax has been refunded to the purchaser. The records of the retailer must clearly reflect and support the claim for refund for an overpayment of tax or adjustment to taxable receipts for the period in which the refund occurs.

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SECTION 1.(j)  G.S. 105‑164.12B reads as rewritten:
"§ 105‑164.12B.  Tangible personal property sold below cost with conditional contract.
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(b)	Tax. – If a seller transfers an item of tangible personal property as part of a conditional contract, a sale has occurred. The sales price of the item is presumed to be the retail price at which the item would sell in the absence of the conditional contract.

	
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SECTION 1.(k)  G.S. 105‑164.13A is repealed.
SECTION 1.(l)  G.S. 105‑164.14 reads as rewritten:
"§ 105‑164.14.  Certain refunds authorized.
(a)	Interstate Carriers. – An interstate carrier is allowed a refund, in accordance with this section, of part of the sales and use taxes paid by it on the purchase in this State of railway cars and locomotives, and fuel, lubricants, repair parts, and accessories for a motor vehicle, railroad car, locomotive, or airplane the carrier operates. An "interstate carrier" is a person who is engaged in transporting persons or property in interstate commerce for compensation. The Secretary shall prescribe the periods of time, whether monthly, quarterly, semiannually, or otherwise, with respect to which refunds may be claimed, and shall prescribe the time within which, following these periods, an application for refund may be made.
An applicant for refund shall furnish the following information and any proof of the information required by the Secretary:
(1)	A list identifying the railway cars, locomotives, fuel, lubricants, repair parts, and accessories purchased by the applicant inside or outside this State during the refund period.
(2)	The purchase price of the taxable tangible personal property listed in subdivision (1) of this subsection. For purposes of this subdivision, the term "taxable" is based on the imposition of tax on the tangible personal property in the State.
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For each applicant, the Secretary shall compute the amount to be refunded as follows. First, the Secretary shall determine the mileage ratio. The numerator of the mileage ratio is the number of miles the applicant operated all motor vehicles, railroad cars, locomotives, and airplanes in this State during the refund period. The denominator of the mileage ratio is the number of miles the applicant operated all motor vehicles, railroad cars, locomotives, and airplanes both inside and outside this State during the refund period. Second, the Secretary shall determine the applicant's proportional liability for the refund period by multiplying this mileage ratio by the purchase price of the tangible personal property identified in subdivision (1) of this subsection and then multiplying the resulting product by the tax rate that would have applied to the items if they had all been purchased in this State. Third, the Secretary shall refund to each applicant the excess of the amount of sales and use taxes the applicant paid in this State during the refund period on these items over the applicant's proportional liability for the refund period.
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(b)	Nonprofit Entities and Hospital Drugs. – A nonprofit entity is allowed a semiannual refund of sales and use taxes paid by it under this Article on direct purchases of items for use in carrying on the work of the nonprofit entity. Sales and use tax liability indirectly incurred by a nonprofit entity through reimbursement to an authorized person of the entity for the purchase of tangible personal property for use in carrying on the work of the nonprofit entity is considered a direct purchase by the entity. Sales and use tax liability indirectly incurred by a nonprofit entity on building materials, supplies, fixtures, and equipment that become a part of or annexed to any building or structure that is owned or leased by the nonprofit entity and is being erected, altered, or repaired for use by the nonprofit entity for carrying on its nonprofit activities is considered a sales or use tax liability incurred on direct purchases by the nonprofit entity. The refund allowed under this subsection does not apply to purchases of electricity, telecommunications service, ancillary service, piped natural gas, video programming, or a prepaid meal plan. A request for a refund must be in writing and must include any information and documentation required by the Secretary. A request for a refund for the first six months of a calendar year is due the following October 15; a request for a refund for the second six months of a calendar year is due the following April 15. The aggregate annual refund amount allowed an entity under this subsection for the State's fiscal year may not exceed thirty‑one million seven hundred thousand dollars ($31,700,000).
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(c)	Certain Governmental Entities. – A governmental entity listed in this subsection is allowed an annual refund of sales and use taxes paid by it under this Article on direct purchases of items. Sales and use tax liability indirectly incurred by a governmental entity on building materials, supplies, fixtures, and equipment that become a part of or annexed to any building or structure that is owned or leased by the governmental entity and is being erected, altered, or repaired for use by the governmental entity is considered a sales or use tax liability incurred on direct purchases by the governmental entity for the purpose of this subsection. The refund allowed under this subsection does not apply to purchases of electricity, telecommunications service, ancillary service, piped natural gas, video programming, or a prepaid meal plan. A request for a refund must be in writing and must include any information and documentation required by the Secretary. A request for a refund is due within six months after the end of the governmental entity's fiscal year.
This subsection applies only to the following governmental entities:
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(20)	A constituent institution of The University of North Carolina, but only with respect to sales and use tax paid by it for tangible personal property that are eligible for refund under this subsection acquired by it through the expenditure of contract and grant funds.
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SECTION 1.(m)  G.S. 105‑164.20 reads as rewritten:
"§ 105‑164.20.  Cash or accrual basis of reporting.
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(b)	Accrual Basis. – For purposes of reporting and remitting sales tax under this Article, a retailer listed in this subsection must report the gross receipts it derives from the taxable transaction listed in this subsection on an accrual basis of accounting. The following retailers must report gross receipts as provided in this subsection:
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SECTION 1.(n)  G.S. 105‑164.26 reads as rewritten:
"§ 105‑164.26.  Presumption that sales are taxable.
For the purpose of the proper administration of this Article and to prevent evasion of the retail sales tax, the following presumptions apply:
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SECTION 1.(o)  G.S. 105‑164.27A reads as rewritten:
"§ 105‑164.27A.  Direct pay permit.
(a)	General. – A general direct pay permit authorizes its holder to purchase certain items without paying tax to the seller and authorizes the seller to not collect any tax on a sale to the permit holder. A general direct pay permit may not be used for purposes identified in subsections (a1), (a2), (a3), or (b) of this section. A person who purchases an item under a direct pay permit issued under this subsection is liable for use tax due on the purchase. The tax is payable when the property is placed in use. A direct pay permit issued under this subsection does not apply to taxes imposed under G.S. 105‑164.4 on sales of electricity, piped natural gas, video programming, spirituous liquor, or the gross receipts derived from rentals of accommodations.
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(a3)	Boat and Aircraft. – A direct pay permit issued under this subsection authorizes its holder to purchase tangible personal property or certain digital property for a boat, an aircraft, or a qualified jet engine without paying tax to the seller and authorizes the seller to not collect any tax on the purchased items from the permit holder. A person who purchases the tangible personal property or certain digital property under a direct pay permit must file a return and pay the tax due to the Secretary in accordance with G.S. 105‑164.16. A permit holder is allowed a use tax exemption on the installation charges that are a part of the sales price of tangible personal property or certain digital property purchased by the permit holder for a boat, an aircraft, or a qualified jet engine, provided the installation charges are separately stated and identified as such on the invoice or other documentation given to the permit holder at the time of the sale.
In lieu of purchasing under a direct pay permit pursuant to this subsection, a purchaser may elect to have the seller collect and remit the tax due on behalf of the purchaser. Where the purchaser elects for the seller to collect and remit the tax, an invoice given to the purchaser bearing the proper amount of tax on a retail transaction extinguishes the purchaser's liability for the tax on the transaction. Where a seller cannot or does not separately state installation charges that are a part of the sales price of tangible personal property or certain digital property for a boat, an aircraft, or a qualified jet engine on the invoice or other documentation given to the purchaser at the time of the sale, tax is due on the total purchase price.

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SECTION 1.(p)  G.S. 105‑187.5 reads as rewritten:
"§ 105‑187.5.  Alternate tax for a limited possession commitment.
(a)	Election. – A retailer may elect not to pay the tax imposed by this Article at the rate set in G.S. 105‑187.3 when applying for a certificate of title for a motor vehicle purchased by the retailer for a limited possession commitment. A retailer who makes this election shall pay a tax on the gross receipts of the limited possession commitment of the vehicle. Like the tax imposed by G.S. 105‑187.3, this alternate tax is a tax on the privilege of using the highways of this State. The tax is imposed on a retailer, but is to be added to the limited possession commitment of a motor vehicle and thereby be paid by the person who enters into a limited possession commitment with a retailer.
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SECTION 1.(q)  G.S. 105‑237.1 reads as rewritten:
"§ 105‑237.1.  Compromise of liability.
(a)	Authority. – The Secretary may compromise a taxpayer's liability for a tax that is collectible under G.S. 105‑241.22 when the Secretary determines that the compromise is in the best interest of the State and makes one or more of the following findings:
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(7)	The assessment is for sales tax the taxpayer failed to collect or use tax the taxpayer failed to pay as a result of the change in the definition of retailer or the sales tax base expansion to sales transactions for a person in retail trade. The Secretary must determine that the taxpayer made a good‑faith effort to comply with the sales and use tax laws. This subdivision applies to assessments for any reporting period beginning March 1, 2016, and ending December 31, 2022.
	
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SECTION 1.(r)  G.S. 105‑467(b) reads as rewritten:
"(b)	Exemptions and Refunds. – The State exemptions and exclusions contained in Article 5 of Subchapter I of this Chapter, except for the exemption for food in G.S. 105‑164.13B, apply to the local sales and use tax authorized to be levied and imposed under this Article. The State refund provisions contained in G.S. 105‑164.14 and G.S. 105‑164.14A apply to the local sales and use tax authorized to be levied and imposed under this Article. A refund of an excessive or erroneous State sales tax collection allowed under G.S. 105‑164.11 applies to the local sales and use tax authorized to be levied and imposed under this Article. The aggregate annual local refund amount allowed an entity under G.S. 105‑164.14(b) for the State's fiscal year may not exceed thirteen million three hundred thousand dollars ($13,300,000).
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PART II. REPEAL OF SERVICE TAX EXEMPTIONS
SECTION 2.(a)  G.S. 105‑164.13 reads as rewritten:
"§ 105‑164.13.  Retail sales and use tax.
The sale at retail and the use, storage, or consumption in this State of the following items are specifically exempted from the tax imposed by this Article:
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(43b)	Computer software or certain digital property that becomes a component part of other computer software or certain digital property that is offered for sale.
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(61c)	Installation charges that are a part of the sales price of tangible personal property purchased by a real property contractor to fulfill a real property contract for an item that is installed or applied to real property. The exemption also applies to installation charges by a retailer‑contractor when performing installation services for a real property contract. The exemption includes any labor costs provided by the real property contractor, including employees' wages, or labor purchased from a third party that would otherwise be included in the definition of "purchase price."

(62a)	A replacement item or repair part used to maintain or repair tangible personal property or a motor vehicle pursuant to a manufacturer's warranty or a dealer's warranty. For purposes of this subdivision, the following definitions apply:
a.	Dealer's warranty. – An explicit warranty the seller of an item extends to the purchaser of the item as part of the purchase price of the item.
b.	Manufacturer's warranty. – An explicit warranty the manufacturer of an item extends to the purchaser of the item as part of the purchase price of the item.
	
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SECTION 2.(b)  G.S. 105‑164.13E reads as rewritten:
"§ 105‑164.13E.  Exemption for farmers.
(a)	Exemption. – A qualifying farmer is a person who has an annual income from farming operations for the preceding taxable year of ten thousand dollars ($10,000) or more or who has an average annual income from farming operations for the three preceding taxable years of ten thousand dollars ($10,000) or more. For purposes of this section, the term "income from farming operations" means sales plus any other amounts treated as gross income under the Code from farming operations. A qualifying farmer includes a dairy operator, a poultry farmer, an egg producer, and a livestock farmer, a farmer of crops, a farmer of an aquatic species, as defined in G.S. 106‑758, and a person who boards horses. A qualifying farmer may apply to the Secretary for an exemption certificate number under G.S. 105‑164.28A. The exemption certificate expires when a person fails to meet the income threshold for three consecutive taxable years or ceases to engage in farming operations, whichever comes first.
Except as otherwise provided in this section, the items exempt under this section must be purchased by a qualifying farmer or conditional farmer and used by the qualifying or conditional farmer primarily in farming operations. For purposes of this section, an item is used by a farmer for farming operations if it is used for the planting, cultivating, harvesting, or curing of farm crops, in the production of dairy products, eggs, or animals, or by a person who boards horses. The items that may be exempt from sales and use tax under this section are:
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SECTION 2.(c)  G.S. 105‑164.13F reads as rewritten:
"§ 105‑164.13F.  Exemption for wildlife managers.
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(b)	Exemption. – Certain items purchased by a wildlife manager and used primarily for wildlife management activities may be exempt from sales and use tax under this section. The items that may be exempt under this section are:
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PART III. SALES TAX DEFINITION UPDATES
SECTION 3.  G.S. 105‑164.3 reads as rewritten:
"§ 105‑164.3.  Definitions.
The following definitions apply in this Article:
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(25)	Bundled transaction. – A retail sale of two or more distinct and identifiable items, at least one of which is taxable and one of which is nontaxable, for one nonitemized price. The term does not apply to real property. Items are not sold for one nonitemized price if an invoice or another sales document made available to the purchaser separately identifies the price of each item. A bundled transaction does not include the retail sale of any of the following:
a.	An item and any packaging that accompanies the item and is exempt under G.S. 105‑164.13(23).
b.	A sale of two or more items whose combined price varies, or is negotiable, depending on the items the purchaser selects.
c.	A sale of an item accompanied by a transfer of another item with no additional consideration.
d.	An item and the delivery or installation of the item.
e.	An item and any service necessary to complete the sale.
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(31)	Capital improvement. – One or more of the following:
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c.	Installation of a transmission, distribution, or other network asset on land owned by a service provider or on a right‑of‑way or easement in favor of a service provider, notwithstanding that any separately stated charges billed to a customer for contribution in aid of construction are included in the gross receipts derived from services subject to the combined general rate under G.S. 105‑164.4. For purposes of this sub‑subdivision, the term "service provider" means a person, including a governmental entity, who provides any of the services listed in this sub‑subdivision, and the term "governmental entity" means a State agency, the federal government, or a governmental entity listed in G.S. 105‑164.14(c). The services are:
1.	Telecommunications service or ancillary service.
2.	Video programming.
3.	Electricity or piped natural gas.
4.	Water or sewer service.
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e.	Painting or wallpapering of real property.
f.	Replacement or installation of a septic tank system, siding, roof, plumbing, electrical, commercial refrigeration, irrigation, sprinkler, or other similar system.
g.	Replacement or installation of a heating or air conditioning unit or a heating, ventilation, or air conditioning system.
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k.	An addition or alteration to real property that is permanently affixed or installed to real property.
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(87)	Facilitator. – An accommodation facilitator or an admission facilitator.
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(95)	Gross sales. – The sum total of the sales price of all sales of tangible personal property and digital property.
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(113)	Item. – Tangible personal property or digital property unless the context requires otherwise.
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(159)	Nonresident retail or wholesale merchant. – A person who does not have a place of business in this State, is registered for sales and use tax purposes in a taxing jurisdiction outside the State, and is engaged in the business of acquiring, by purchase, consignment, or otherwise, tangible personal property or certain digital property and selling the property outside the State.
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(211)	Real property management services. – Any of the following activities:
a.	Hiring and supervising employees for the real property.
b.	Providing a person to manage the real property.
c.	Receiving and applying revenues received from property owners or tenants of the real property.

	
g.	Handling administrative affairs for the real property.
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(219)	Remodeling. – A transaction comprised of multiple services performed by one or more persons to restore, improve, alter, or update real property. The term includes a transaction where the internal structure or design of one or more rooms or areas within a room or building are substantially changed. Examples include repair of sheetrock that includes applying paint, replacement of cabinets that includes installation of caulk or molding, and the installation of hardwood floors that includes installation of shoe molding.
(221)	Remote sale. – A sale of an item ordered by mail, telephone, Internet, mobile phone application, or another method by a retailer who receives the order in another state and delivers the item or makes it accessible to a person in this State or causes the item to be delivered or made accessible to a person in this State. It is presumed that a resident of this State who makes an order was in this State at the time the order was made.
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(235)	Sale or selling. – The transfer for consideration of title, license to use or consume, or possession of tangible personal property or certain digital property or the performance for consideration of a service. The transfer or performance may be conditional or in any manner or by any means. The term applies to the following:
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PART IV. EFFECTIVE DATE
SECTION 4.  This act becomes effective July 1, 2025, and applies to services provided on or after that date.