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Bill Summary · SB 877

Summary of S.B. 877 (North Carolina, 2025 Session) – Repeal Service Tax

Note: This bill was filed April 28, 2026. It proposes repealing North Carolina’s service tax and making conforming changes across the tax code.

1) Purpose and Intent

  • Main goal: Repeal the state service tax and implement necessary conforming changes to remove the tax while adjusting related provisions to maintain tax administration and fairness.
  • The bill also revises numerous definitions, exemptions, and administration provisions to align with the repeal and simplify tax treatment of services and related transactions.

2) Key Provisions and Changes

A. Repeal of the Service Tax and Related Conformings (Part I)

  • Repeals or repeals/renumbers several sections related to the service tax and its administration.
  • Rewrites and consolidates rules that previously defined how service-related transactions were taxed, including real property contracts, bundled transactions, and marketplace-facilitated sales.
  • Repeals or supersedes various subsections of G.S. 105-164.4 (imposition of tax on retailers and facilitators) and related sections such as:
    • 105-164.4I (service contracts) and 105-164.4J (marketplace-facilitated sales) (with adjustments and conforming edits).
    • 105-164.11A (refund of tax paid on rescinded sale or cancellation of service) and related refund mechanics.
    • 105-164.13A (existing repealed sections) and other related subsections that interface with service tax mechanics.
  • Creates adjustments to how certain contracts are treated (real property contracts, mixed transactions, property management contracts) under the new post-repeal framework.
  • Maintains some refund provisions (local/state interplay) and direct-pay concepts but reframed for repeal context.

B. Repeal of Service Tax Exemptions (Part II)

  • Repeals or substantially revises numerous exemptions currently tied to the service tax, including:
    • 105-164.13 exemptions (e.g., computer software/digital property components; interior design services; motor vehicle service contracts, and various repair/maintenance service exemptions).
    • Specific exemptions for farmers, wildlife managers, and other specialized exemptions, replacing or repurposing them in light of the service tax repeal.
    • Provisions related to how exemptions are documented and substantiated when purchases are made on behalf of exempt entities.
  • The net effect: numerous exemptions tied to the service tax would be removed or substantially altered, necessitating new policy choices about which services remain exempt or taxable in the post-repeal regime.

C. Updates to Sales Tax Definitions (Part III)

  • Updates to key definitions in G.S. 105-164.3, including:
    • Bundled transaction, capital improvement, real property contract, mixed transaction contract, service contract, and related terms.
    • Introduction or clarification of “Real property management services” and “Real property management contracts,” with criteria for when repair/maintenance/installations are taxed.
    • Clarifies what constitutes a bundled transaction and how components within bundles are treated for tax purposes.
    • Adds or clarifies the definition of the “Facilitator” and other related terms to align with post-repeal administration.
    • Overall aim: ensure the tax code remains coherent and administrable after the service tax is repealed.

D. Effective Date (Part IV)

  • Effective date: July 1, 2026.
  • Applies to services provided on or after that date.

3) Who or What Would Be Affected

  • Retailers and service providers: Definitions and tax collection/remittance mechanisms are adjusted to reflect repeal.
  • Real property professionals (contractors, property managers): Revisions to real property contracts, mixed transactions, and capital improvements; new rules for allocation and substantiation of taxable vs. exempt components.
  • Marketplace facilitators and accommodations/admissions/service contracts: Tax collection responsibilities and exemptions are revised, potentially altering compliance burdens.
  • Exempt entities and exemption processes: Farmers, wildlife managers, nonprofits, and governmental entities may see changes to exemptions and documentation requirements.
  • Tax administration and refunds: Refund mechanics (on rescissions or cancellations) and interplay between state/local refunds are adjusted to align with repeal.

4) Procedural and Timeline Considerations

  • Effective date: July 1, 2026.
  • Applies to services provided on or after the effective date.
  • The bill includes extensive conforming changes across multiple chapters and sections, indicating a broad realignment of the tax code beyond simply removing the service tax.

5) Observations for Readers

  • The bill is expansive and highly technical, touching numerous definitions, exemptions, and administrative provisions.
  • If enacted, North Carolina would transition away from the service tax and reframe many service-related transactions under existing sales/use tax structures, titles, and refund processes.
  • Key implementation questions would include which services (if any) remain exempt after repeal, how previously exempt entities document purchases, and how refunds and distributions are managed under the updated framework.

Compiled from official sources — confirm details with the bill’s official record.

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