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Frequently Asked Questions About Use Tax

What is use tax?

Use tax is a tax due on purchases, leases, and rentals of tangible personal property and certain digital property purchased, leased or rented inside or outside this State for storage, use, or consumption in North Carolina. Use tax is also due on taxable services sourced to North Carolina. Use tax is paid to the North Carolina Department of Revenue by the purchaser when the North Carolina tax has not been collected by the retailer.

What is the use tax rate?

Use tax is calculated at the same rate as the sales tax.

What items are subject to use tax?

North Carolina use tax is due to be paid by individuals and businesses if the seller fails to collect the applicable sales tax on the following items: 

  1. Tangible personal property purchased, leased or rented inside or outside this State for storage, use, or consumption in this State.  This includes tangible personal property that becomes part of a building or another structure.
  2. Certain digital property purchased inside or outside this State for storage, use, or consumption in this State.
  3. Services sourced to this State.
  4. Prewritten software including electronic downloads of software.
  5. Purchases of or recharges of prepaid telephone calling cards and phones.
  6. Certain service contracts.
  7. Admission tickets to an entertainment activity purchased outside the State where admission to the activity may be gained in the State.
  8. Repair, maintenance, and installation services performed on tangible personal property outside the State where the tangible personal property is returned to the owner or owner's designee in this State.

 

Why doesn't the out-of-state retailer collect the tax?

If the retailer is located out-of-state and is not engaged in business in the State, the State cannot require the retailer to collect North Carolina's tax unless the seller has gross sales in excess of one hundred thousand dollars ($100,000) sourced to North Carolina or two hundred (200) or more separate transactions sourced to North Carolina in the previous or current calendar year. However, some out-of-state retailers voluntarily collect the North Carolina tax as a convenience to their customers.

Why do I have to start paying use tax now?

Use tax was enacted in 1939. The Department has included use tax reporting requirements in the instructions of the Individual Income Tax Form Booklets since 1990. Businesses must register to report and remit use tax due on items purchased for storage, use, or consumption in their businesses in the State.

How did the Department determine the amount of use tax due in the Use Tax Table of the Individual Income Tax Instructions?

The Department compared the information used in other states and made adjustments for the Total General State, Local and Transit Rates.

I rarely make purchases from out-of-state vendors. Do I still have to pay the amount of use tax shown in the Use Tax Table?

If an individual maintained a record of all purchases during the income tax year from out-of-state retailers, use the worksheet in the Individual Income Tax Instructions for Form D-400 for the applicable tax year to compute the use tax liability due on purchases on which sales or use tax was not paid to the retailer at the time of purchase. If an individual did not maintain a record of all purchases during the income tax year from out-of-state retailers, use the worksheet in the Individual Income Tax Instructions for Form D-400 for the applicable year to determine the amount of use tax due.

If the calculated amount of use tax due is higher than the use tax due when using the Use Tax Table, which amount do I pay?

An individual should only use the Use Tax Table if the amount of purchases subject to use tax is unknown; therefore, pay the calculated amount of use tax due.

If I enter "0" on the use tax line or do not enter an amount, will I receive a bill or be audited?

A person will not automatically receive a bill for use tax if an amount for use tax is not reported due. If the Department discovers through other means that a person owes use tax on purchases, the person will be assessed tax plus penalties and interest. In addition, a person may be selected for audit by the Department.

If I make purchases of tangible personal property, certain digital property, or taxable services while in another state, do I owe North Carolina use tax on these purchases?

If the items are purchased for storage, use, or consumption in North Carolina, they are subject to the North Carolina use tax no matter that the items are delivered to the purchaser or the purchaser's designee in another state or shipped to North Carolina. If another state's sales or use tax was due and paid on the out-of-state purchases, credit for the tax paid is allowed against the North Carolina use tax due. You may not claim a credit for sales tax or value-added tax (VAT) paid to another country.

If I purchase tangible personal property from an out-of-state retailer, are the shipping and handling charges subject to the North Carolina use tax?

All shipping, handling, transportation, and delivery charges imposed by the retailer that are in any way connected with the sale of taxable tangible personal property, certain digital property, and certain services for storage, use, consumption or otherwise sourced to the State, are subject to the North Carolina use tax.

Didn't the Internet Tax Freedom Act (ITFA) ban taxes on sales over the Internet?

ITFA prohibited new taxes on internet access fees and multiple or discriminatory taxes. North Carolina does not tax Internet access fees. In addition, use tax is not a multiple or discriminatory tax since it applies to all transactions (mail order, internet, out-of-state, home shopping) and taxes goods purchased outside the State in the same manner as goods purchased in the State.