2016 NC Legislative Update: A Taxing Session for HOAs and Condos

Community Association Legislation

For those in the community association industry watching this year’s legislative session, it was fairly quiet. Of the 10 or so legislative proposals specifically dealing with homeowner or condominium associations still alive for the two-year session (see this recent Legislative Update), only a few bills even received discussion. None were adopted. In that regard, 2016 was uneventful.

That said, one significant legislative act NOT specifically related to HOA’s and condos will almost certainly cost community associations money. And may require some community association budgets to be increased. And it has to do with sales taxes. For many years North Carolina has relied heavily upon income taxes for revenue. During the past few legislative sessions, the General Assembly has begun shifting more towards sales taxes. In 2013 the General Assembly reduced corporate and individual income tax rates and also eliminated various income tax deductions and credits.  All of this was part of the larger plan to expand sales taxes and to move North Carolina towards a consumption-based tax system.

In 2015 the General Assembly passed legislation to expand sales taxes to include repair, maintenance and installation services (“RMI services”). However, the legislation was rather confusing as it included many exceptions and special rules. For instance, plumbing repairs were taxed if the plumber also sold supplies as a retailer, but not if the plumber only provided services. Even in the community association industry, this caused much confusion. The Department of Revenue received so many questions about details of the taxes that several webpages were created to explain who was subject to the tax.

This session, in what it says were efforts to clear up confusion over taxing of RMI services, the legislature has expanded the types of services subject to sales tax. Basically, some of the exceptions created in 2015 have gone away. Minor repairs and maintenance on homes and buildings will now be subject to sales tax. Major installation of flooring, plumbing, and HVAC won’t be. Other exemptions to the new sales taxes: towing, janitorial services, pest control, landscaping, paving, painting, wallpapering and roofing. I can’t possibly describe the intricacies of the tax changes, as I don’t fully understand them yet. I’m not sure anyone does. Take a look at this News & Observer article [link removed as no longer available], which raises as many questions as it answers.

So how does this all get sorted out? In the next few months there will almost certainly be blogs and webpages from accountants, newspaper articles on the taxes, white papers from the Department of Revenue, and educational programs by groups like the North Carolina Chapter of the Community Associations Institute on the impact these tax changes will have on associations and association budgets. Depending on the type of association (condo versus single family), types of services provided by an association (i.e., whether the association repairs and maintains units, etc.), and even the age of the association (in that older associations often have more maintenance costs), the impact of these legislative changes will be different. About the only thing that is certain is that association costs for services will go up, not down. (And because HOA’s and condominiums are nonprofits, the argument that higher sales taxes will be offset by lower personal or for-profit corporation taxes would not seem to apply.) Now is the time for community managers and other association professionals to begin understanding these changes so that we can properly advise our clients.

HOA & Condo Associations