Is Labor Taxable in North Carolina? Sales Tax on Contractor Labor

What counts as a capital improvement

The definition in the statute is a list, and a job needs to meet only one item on it. The ones that matter most to the trades:

• New construction, reconstruction or remodeling.
• Work that needs a permit under the State Building Code, other than repairing or replacing electrical components, gas logs, a water heater and "similar individual items" outside a larger construction or remodel job.
• Installing or replacing a septic tank system, siding, a roof, or a plumbing, electrical, commercial refrigeration, irrigation or sprinkler system.
• Installing or replacing a heating or air conditioning unit or a full HVAC system.
• Installing or replacing roads, driveways, parking lots, patios, decks and sidewalks.
• Painting or wallpapering, unless the painting is incidental to a repair.
• Landscaping.
• Installing equipment or a fixture attached to the building that is capitalized and depreciated, or expensed under Section 179.
• An addition or alteration permanently affixed to the property that is not itself one of the RMI activities.
• Callback work to fix an issue from a real property contract within six months of finishing it, or within 12 months of first occupancy for new construction.

Remodeling has a test. It means several services that would each be taxable RMI on their own, connected in time and in scope, that restore, improve or update the property, or that substantially change the layout of a room. A kitchen job with new cabinet boxes, tile floor, paint and a new sink qualifies. So does a shower rebuilt with tile walls and floor, a glass door and new fixtures. Pulling out a fiberglass shower enclosure and dropping in a new one does not: the Department calls that a single taxable replacement. Two unrelated repairs in different rooms, or a toilet repair followed by new countertops three months later, are separate RMI jobs.

Replacing like with like stays a repair. The statute puts installing carpet, flooring, windows, doors, cabinets and countertops that replace a similar existing item inside RMI, and it adds that replacing "more than one of a like-kind item, such as replacing one or more windows," is still RMI. Re-windowing a whole house is a taxable job, however large the bill.

A permit has to be required. Pulling a permit the Building Code did not call for does not make the job a capital improvement, and a required permit does not rescue a water heater or electrical component swap.

Source: N.C. Gen. Stat. 105-164.3(31), (219) and (225), NCDOR: Real Property Contracts and SUTB 72-4, Capital Improvement Determination.

Proving it: Form E-589CI, Form E-589P and your records

The Department's recommended proof that a job is a real property contract is Form E-589CI, Affidavit of Capital Improvement. The property owner, the tenant, or a general contractor hiring you as a subcontractor fills it in and hands it to you at the start of the work. Section I covers a single project. Section II is a blanket version a general contractor can give a subcontractor it uses regularly, valid while no more than 12 months pass between jobs.

The affidavit moves the risk. If you receive it within 90 days of the sale, or within 120 days of the Department asking for it, you are not liable for more tax if the job later turns out to be a taxable repair, absent fraud. The person who signed it owes the difference, and misusing the form carries a $250 penalty. The affidavit is not an exemption certificate. It cannot be used to buy lumber, fixtures or anything else without paying tax.

At the end of the job, Form E-589P, Affidavit of Tax Paid by Real Property Contractor goes the other way: you certify you paid tax on the materials you installed and give it to the owner or general contractor, which settles their own liability for that tax.

On jobs the statute names outright, such as a new air conditioning system, clear records can stand in: an invoice saying a new system was installed, the matching purchase invoice, and the permits. The Department still recommends the affidavit, especially for a subcontractor doing one piece of a larger remodel.

Never put a tax line on a real property contract. The statute calls any tax separately stated on that invoice an "erroneous collection," and it must be sent to the state even though you already paid tax on the materials.

Source: N.C. Gen. Stat. 105-164.4H(a1) and (c) and SUTB 72-3, 72-5 and 72-8.

Materials on a capital improvement job

On a real property contract you are the end user of everything you install and everything you use up, so your supplier charges you tax at the counter. If a seller does not charge North Carolina tax, for example an out-of-state supplier, you owe use tax directly to the Department. The tax you pay is a cost of the job. Build it into your material prices.

Materials are generally taxed where you take possession of them. If you pick up at a supply house in a lower-rate county and install in a higher-rate one, you may owe the difference as use tax to the county where the work is.

Freestanding appliances such as a refrigerator, range or washer are a retail sale, installation included, even on a remodel.

Source: N.C. Gen. Stat. 105-164.4H(a) and SUTB 72-9 and 72-15.

Mixed jobs and the 25% rule

A mixed transaction contract combines a capital improvement with RMI work on the property that has nothing to do with the improvement. North Carolina decides how to tax it by the share of the contract price that belongs to the unrelated repairs, based on "a reasonable allocation" your records support.

• 25% or less. The whole contract is taxed as a real property contract. The repair work is untaxed to the customer, and you pay tax on the materials used for it.
• More than 25%. You charge tax on the allocated price of the RMI work. The capital improvement part stays untaxed, and you still pay tax on all materials as a real property contractor.

Two examples. A $38,000 kitchen remodel that also includes a $600 repair to a garage door opener: the repair is about 1.6% of the price, so the entire contract is a real property contract with no tax line. A $7,500 new deck sold together with $3,500 to replace five interior doors: the doors are about 32% of the $11,000 price, so the $3,500 is taxable and the deck is not. In Durham County at 7.5% that is $262.50 of tax on the door lines only.

Write the unrelated work on its own lines with its own price. The allocation has to come from your books, and an invoice that splits the work is the first thing that supports it.

Source: N.C. Gen. Stat. 105-164.4H(d) and SUTB 72-6, Mixed Transaction Contracts.

Repairs to buildings: what the plumber, electrician and HVAC tech collect

Most service calls are RMI. The Department's taxability chart marks these as taxable, among many others: unclogging drains, stopping leaks, replacing a toilet, sink or faucet, repairing or replacing a water heater (including a tank-to-tankless swap), replacing breakers, outlets or a light fixture, replacing a blower, coil or thermostat, roof repairs, gutter work, and replacing windows and doors.

Diagnosis is taxable on its own. The definition includes troubleshooting "to identify the source of a problem," so a trip charge to find a fault is part of the taxable sale even when the customer decides not to go ahead with the repair.

Take a water heater replacement in Raleigh billed at $1,850, with the unit, fittings, haul-away and labor on separate lines. Wake County's combined rate is 7.25%, so the customer owes $134.13 of tax on the whole $1,850. The same tech replacing the house's complete furnace and air handler is on a capital improvement and charges no tax.

Parts and materials that become part of the customer's property on an RMI job can be bought without tax as a purchase for resale, using Form E-595E, the Streamlined Sales and Use Tax Certificate of Exemption, because you are selling them on through your taxable bill. Tools, equipment and supplies you use up are taxable to you.

Source: NCDOR: Services to Real Property Taxability Chart, N.C. Gen. Stat. 105-164.3(225) and SUTB 75-5 and 75-8.

Repairs to equipment and vehicles

RMI on movable property and motor vehicles is taxed the same way, on the full charge. The bulletin's examples include servicing or tuning up a car, a lawnmower, trimmer, chainsaw, pressure washer, generator, boat or golf cart, and troubleshooting a fluid leak or an odd noise "whether or not the source of the leak or noise is located." A shop buys the parts it installs for resale and taxes them on the customer's bill with the labor.

Two exemptions come up often in a repair shop. Work done under a manufacturer's warranty or a dealer's warranty is exempt. The state emissions and safety inspection fee is exempt when it is separately stated on the invoice.

Location follows the customer. A repair is taxed where the customer first gets the repaired item back: at your shop if they pick it up, at their address if you deliver it.

Source: N.C. Gen. Stat. 105-164.4(a)(1)c. and SUTB 75-3, 75-4 and 75-11.

Cleaning, lawn care, landscaping and pest control

Cleaning is maintenance, so it would be RMI, but the law exempts cleaning of real property. That covers custodial and maid service, window washing, carpet cleaning, disinfecting, mold remediation, gutter and duct cleaning, and power washing buildings, driveways and decks. Two exceptions: cleaning a swimming pool, fish tank or similar water feature is taxable, and so is cleaning that is part of a taxable accommodation rental. Removing trash, debris and snow is exempt as well, and so is pest control, meaning the application of pesticides to real property.

Landscaping is on the capital improvement list. The statute's definition is a service that "modifies the living elements of an area of land," and the examples are planting trees, shrubs or flowers, tree trimming, mowing, and spreading seed, mulch, pine straw or fertilizer. A weekly mowing route charges no sales tax, and you pay tax on the seed, mulch, plants and fertilizer you buy. Work on plants in pots or indoors is not landscaping.

The repairs around the yard are still RMI. The chart lists repairing irrigation components, landscape lighting, fence sections and gates, and installing an invisible pet fence as taxable. Installing a complete sprinkler system or a permanent fence is a capital improvement.

Source: SUTB 75-3 and 72-2 and NCDOR: Services to Real Property Taxability Chart.

Churches, charities, schools and government: a refund, not an exemption

North Carolina does not let a contractor buy building materials tax free because the owner is a nonprofit or a government. You pay tax at purchase on the materials for their building as you would for anyone. Sales to cities, counties and other local governments are taxable, and even a state agency's exemption number does not reach materials sold to a real property contractor working on its project.

The relief goes to the owner as a refund. Qualifying nonprofits claim semiannually, certain local governments annually, and state agencies quarterly for the local and transit part, and each may include the tax its contractor paid on materials that became part of its building. To support the claim the owner needs a certified statement from you listing each purchase: date, type of property, seller and invoice number, price and tax paid, project, and county. Leave out scaffolding, concrete forms, fuel, tools and equipment rentals, which do not qualify.

Whether the job itself is taxable still depends on the work. A repair for a church is RMI like any other, and the church may recover the tax through its own refund claim if it qualifies.

Source: SUTB 37-1, 74-3, 74-4 and 74-5.

Which rate applies

The state general rate is 4.75%. Every county adds local tax, and Durham, Orange, Wake and Mecklenburg add a 0.5% transit tax, so the combined rate on an RMI job runs from 6.75% to 8.25% as of the Department's table effective July 1, 2026. Mecklenburg is the highest at 8.25% after adding a 1% county tax on that date. Durham and Orange are at 7.5%, and Wake is at 7.25%.

Use the county where the job is. RMI on real property is taxed where the property is, not where your office sits, so a Gastonia shop working in Charlotte charges the Mecklenburg rate. Check the Department's current county table whenever a rate change is announced.

Source: N.C. Gen. Stat. 105-164.4(a), NCDOR: Current Sales and Use Tax Rates, NCDOR: Mecklenburg County Sales and Use Tax Increase and SUTB 75-11.