Introducing our Sales Tax Automation 101 series. The first installment covers the basics of sales tax automation: what it is and how it can help your business.
Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. North Carolina first adopted a general state sales tax in 1933, and since that time, the rate has risen to 4.75 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0 percent and 2.75 percent. Currently, combined sales tax rates in North Carolina range from 4.75 percent to 7.5 percent, depending on the location of the sale.
As a business owner selling taxable goods or services, you act as an agent of the state of North Carolina by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in North Carolina is administered by the North Carolina Department of Revenue (NCDOR).
Any sales tax collected from customers belongs to the state of North Carolina, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.
In North Carolina, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.
To help you determine whether you need to collect sales tax in North Carolina, start by answering these three questions:
If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.
It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.
The need to collect sales tax in North Carolina is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
While physical presence still triggers a sales tax collection obligation in North Carolina, it’s now possible for out-of-state sellers to have sales tax nexus with North Carolina.
Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:
Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise, and the total cumulative gross receipts from such referrals is more than $10,000 during the preceding four quarters.
Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after November 1, 2018, a remote seller must register with the state, then collect and remit North Carolina sales tax if the remote seller meets either of the following criteria (the economic thresholds):
Marketplace sales: Making sales through a marketplace. Effective February 1, 2020, a marketplace facilitator that made or facilitated more than $100,000 in gross sales or 200 transactions in North Carolina in the current or previous calendar year is required to collect and remit sales tax on behalf of marketplace sellers in the state.
Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in North Carolina in a warehouse owned or operated by Amazon.
If you have sales tax nexus in North Carolina, you’re required to register with the NCDOR and to charge, collect, and remit the appropriate tax to the state.
For more information, see the North Carolina Department of Revenue’s Remote Sales page and 2009 Law Changes.
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of March 2019, North Carolina does not have an explicitly defined trailing nexus policy.
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in North Carolina.
If you sell taxable goods to North Carolina residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).
North Carolina is a destination-based state. This means you’re responsible for applying the sales tax rate determined by the ship-to address on all taxable sales.
For additional information, see the North Carolina Department of Revenue’s Sales and Use Tax Rates & Other Information.