Exemptions from Sales and Use Tax

Overview 

A retailer or wholesaler may purchase items for resale under a Certificate of Exemption in accordance with G.S. § 105-164.28 or a direct pay permit in accordance with G.S. § 105-164.27A. However, if the items are ultimately used by the purchaser instead of resold, the purchaser must pay use tax on the purchase price.

Application Process

In order to make a purchase sourced to North Carolina for resale, a retailer or wholesaler must obtain a certificate of registration from the Department or another State. 

Review the Sales and Use Tax Registration Webpage

Overview

Generally, a manufacturing industry or plant may purchase eligible items exempt from sales and use tax. The statute refers to eligible items as "mill machinery or mill machinery parts or accessories." Generally, mill machinery is manufacturing equipment used in the production phase of manufacturing operations. For example, a piece of equipment that assembles computers to be sold by a computer manufacturer is mill machinery.

This exemption does not apply to other purchases by a manufacturer. For example, this exemption does not apply to electricity, office equipment, or general building materials.

Exemption

Sales of mill machinery or mill machinery parts or accessories to be used in the production process, as the term “production” is defined in Sales and Use Tax Bulletin 57-1, to any of the following are exempt from sales and use tax:

• A manufacturing industry or plant. A manufacturing industry or plant does not include:
  • a delicatessen, café, cafeteria, restaurant, or another similar retailer that is principally engaged in the retail sale of food prepared by it for consumption on or off its premises or
  • a production company.
• A contractor or subcontractor if the purchase is for use in the performance of a contract with a manufacturing industry or plant.
• A subcontractor if the purchase is for use in the performance of a contract with a general contractor that has a contract with a manufacturing industry or plant.

For purposes of this exemption, the term “accessories” does not include electricity.

Refer to Sales and Use Tax Bulletin 58 - Manufacturers for information regarding other exemptions related to manufacturers and manufacturing.

Production Phase

Production as a phase of industrial or manufacturing operations means all steps performed in processing and refining rooms, and in other quarters and departments of a plant, where conditioning, treating, or other operations are done on ingredient materials as an actual routine on the assembly or processing line turning out a finished product of manufacture for sale.

Activities Included

Production as a phase of industrial or manufacturing operations includes:

• The movement of raw materials or ingredients from an inventory or a stockpile located on the premises of the manufacturing facility to the assembly or processing line.
• The movement of goods in process along the assembly or processing line including packaging prior to the good becoming a final product.
• The movement of manufactured products from the assembly or processing line into shipping or storage areas and yards located on the premises of the manufacturing facility.
• The work of experimentation and research performed on the manufactured products.

Activities Not Included

Production as a phase of industrial or manufacturing operations does not include the following:

• Any activity connected with the movement of raw materials or ingredients into inventory.
• Any activity connected with the movement of manufactured products within storage warehouses, shipping rooms, and other such finished product storage areas and the removal of such products therefrom for sale or shipment.
• Machinery and equipment used to prepare property for shipment in the shipping room, warehouse, or other distribution locations separate and apart from the production process.
• Administrative equipment and supplies for use in the administrative work of offices, promotion of sales, and collection of accounts.

Items not included in the production phase of industrial or manufacturing operations are not exempt from sales and use tax.

Registration

A manufacturing industry or plant must register for a sales and use tax account number.

Review the Sales and Use Tax Registration Webpage

Additional Information

• The Sales and Use Tax Bulletins include detailed information on the following:
  • SUTB 57-3 - Examples of mill machinery or mill machinery parts or accessories.
  • SUTB 57-4 - Items that are not mill machinery or mill machinery parts or accessories.
  • SUTB 57 - Industry specific guidance.
  • SUTB 58 - General information for manufacturers and other related exemptions.

Qualifying and Conditional Farmer Exemption Certificate Numbers

North Carolina allows qualifying and conditional farmers registered with the Department to purchase eligible items exempt from sales and use tax. In addition, certain service providers and contractors performing services for a qualifying or conditional farmer may purchase eligible items exempt from sales and use tax.  

Review the Qualifying and Conditional Farmer Overview Page

Overview

A direct pay permit allows the permit holder to purchase certain items without paying sales or use tax to the seller. Instead, the holder of the permit must pay any sales or use tax due on the purchase directly to the Department. 

Purchasing Items with a Direct Pay Permit

A direct pay permit holder may purchase eligible items without paying sales or use tax to the seller. To make a purchase, the permit holder must provide the retailer with one of the following at the time of purchase:

• A copy of the numbered direct pay permit to a retailer or
• A completed Certificate of Exemption including the direct pay permit number.

Note: Only the entity to which the permit is issued by the Department is entitled to make purchases using the direct pay permit. A subsidiary or an affiliate of a permit holder cannot use a direct pay permit. If a permit holder forms a new legal entity, the new entity must apply for a permit.

Selling Items to a Direct Pay Permit Holder

A seller may sell eligible items to a direct pay permit holder without collecting sales or use tax when the direct permit holder provides the retailer one of the following: 

• A copy of the numbered direct pay permit to a retailer or
• A completed Certificate of Exemption including the direct pay permit number.

When making such a sale, the seller should maintain the documentation of the sale, including the direct pay permit or Certificate of Exemption, and record the sale as exempt from sales and use tax.

Types of Direct Pay Permits

The Department can only issue direct pay permits when authorized by State law. The Department currently issues the following types of direct pay permits:

• Tangible Personal Property, Digital Property, or Certain Services
• Telecommunications Service and Ancillary Service
• Direct Mail
• Qualified Jet Engines
• Certain Boat, Aircraft, or Qualified Jet Engine Charges and Services
• Qualifying Spirituous Liquor

Additional Information Regarding Direct Pay Permits

• Sales and Use Tax Bulletin 24 - Direct Pay Permits
• Registry of Direct Pay Permits

Department of Transportation

Sales of items to the North Carolina Department of Transportation ("DOT") are exempt from sales and use tax.

This exemption does not apply to sales to real property contractors or other persons for use in the performance of contracts with DOT or sales of items to employees of DOT.

Purchasing Items

DOT must provide retailers with any of the following:

• A properly completed Certificate of Exemption.
• Purchase requisitions or affidavits signed by a purchasing officer stating that such sales are being made directly to the DOT.

Other State Agencies

Eligible North Carolina State agencies may purchase qualifying items exempt from sales and use tax. A State agency must obtain from the Department a State agency exemption certificate number to be eligible for the exemption.

Eligible State Agencies

All North Carolina State agencies qualify for the State agency exemption certificate number except the following:

• An occupational licensing board, as defined in G.S. § 93B-1.
• An entity listed in G.S. § 105-164.14(c).

Application Process for State Agency Exemption Certificate Number

The State agency must submit Form E-592A, Application for State Agency Exemption Number for Sales and Use Taxes, to apply for a State agency exemption certificate number.

Qualifying Items

The sales and use tax exemption applies to all items subject to sales and use tax under G.S. § 105-164.4, other than electricity, telecommunications service, and ancillary service if all of the following conditions are met:

• The items are purchased by a State agency for its own use and in accordance with G.S. § 105-164.29A.
• The items are purchased pursuant to a valid purchase order issued by a State agency that contains the exemption number of the agency and a description of the property purchased, or the items purchased are paid for with a State-issued check, electronic deposit, credit card, procurement card, or credit account of the State agency.
• For all purchases other than an agency-issued purchase order, the agency must provide to or have on file with the retailer the agency’s exemption number.

Other Taxes that are Not Exempt

The exemption only applies to sales and use tax. The exemption does not apply to the following taxes:

• Local prepared food and beverage taxes.
• Local occupancy taxes.
• Highway use taxes paid on the purchase, lease, or rental of motor vehicles.
• Scrap tire disposal tax.
• White goods disposal tax.
• Dry-cleaning solvent tax.
• Solid waste disposal tax.
• 911 service charge.
• Transportation commerce tax.
• Other states' sales and use taxes.

Prohibited Use of Exemption Number

A state agency exemption number may not be used to avoid payment of the general State, applicable local, and applicable transit rates of sales and use taxes by:

• Real Property Contractors - A real property contractor to purchase items for use to fulfill real property contracts entered into with a State agency.
• Employees - An employee of a State agency to purchase food, lodging, or other taxable items paid by the employee from their own funds and reimbursed by the agency.
• Other Contractors - A person who enters into a contract or agreement with a State agency to purchase items for use to fulfill the contract or agreement entered into with the State agency.
• Other Persons - A person other than the State agency to which an exemption number is issued.

Additional Information

• Sales and Use Tax Bulletin 37: Government - State, Local, Etc.
• Refund claim information for certain governmental entities.
• Search the Exemption Certificate Number Registry

Exemption from Sales and Use Tax

Sales by and sales directly to the United States Government, or any agency or instrumentality thereof, are not subject to sales or use tax.

In order for the purchase by the United States Government, agency or instrumentality to be exempt from sales and use tax, all of the following requirements must be met:

• The United States Government, agency or instrumentality must purchase the item.
• The United States Government, agency or instrumentality must obtain title to the item before or at the time it is delivered.
• The United States Government, agency or instrumentality must pay directly to the vendor the purchase price of such item or use a United States Government credit card to pay the vendor the purchase price of such item.

United States Government Agencies and Instrumentalities

United States Government agencies and instrumentalities include the Departments of Defense, Army, Navy, Air Force, United States hospitals, American Red Cross, Federal Reserve Banks, federal land banks, federal housing projects, federal housing authorities, United States Postal Service, and any other department of the Federal Government whose activities are directly under federal control and whose purchases are paid for from the federal treasury.

Purchasing Items Exempt from Sales and Use Tax

The United States Government, or a qualifying agency or instrumentality thereof must furnish retailers with any of the following:

• A properly completed Certificate of Exemption.
• Purchase requisitions or affidavits signed by a purchasing officer stating that such sales are being made directly to the United States Government or an agency or instrumentality thereof.
• Applicable credit cards issued by the United States Government or qualifying agency or instrumentality thereof to make a purchase exempt from sales and use tax.

Additional Sales and Use Tax Information Regarding the Federal Government

• Sales and Use Tax Bulletin 36: Government - Federal
• Refund claim information for certain governmental entities.

Commercial Fisherman Exemption Certificate Number

A commercial fisherman exemption certificate number allows the commercial fisherman to purchase certain items exempt from sales and use tax. 

Eligible Fishermen 

The following persons qualify for a commercial fisherman exemption certificate number:

• The holder of a standard commercial fishing license issued under G.S. § 113-168.2.
• The holder of a shellfish license issued under G.S. § 113-169.2.
• The operator of a “for-hire vessel,” as defined in G.S. § 113-174.

Application Process

A commercial fisherman must complete and submit Form E-595EA, Application for Exemption Number for Qualified Purchases, to obtain a commercial fisherman exemption certificate number. A commercial fisherman that is already registered to remit sales and use tax should use the previously assigned sales and use tax account identification number to make purchases exempt from sales and use tax. 

Exempt Purchases

The exemption applies to specific items purchased for specific uses. As a result, both the item and the principal use must qualify for the exemption. 

The items eligible for the exemption are the following: 

• Boats.
• Fuel oil.
• Lubricating oils.
• Machinery.
• Equipment.
• Nets.
• Rigging.
• Paints.
• Parts.
• Accessories.
• Supplies (such as paint brushes, acetylene, oxygen, paint rollers, funnels, sanding discs, welding rods, saw blades, drill bits, and similar property).
• Life jackets.
• Foul weather gear.
• Gloves.
• Bait.

The eligible uses of the items are as follows: 

• The holder of a standard commercial fishing license issued under G.S. § 113-168.2 for principal use in commercial fishing operations.
• The holder of a shellfish license issued under G.S. § 113-169.2 for principal use in commercial shellfishing operations.
• The operator of a “for-hire vessel,” as defined in G.S. § 113-174, for principal use in the commercial use of the boat.

Ineligible Purchases

The exemption does not apply to the following items and purchases:

• Food.
• Clothing.
• Other personal effects such as tableware, toothpaste, and soap.
• Items purchased for personal use.

A commercial fisherman must provide to a seller their commercial fisherman exemption certificate number or their previously assigned sales and use tax account identification number on Form E-595E, Streamlined Sales and Use Tax Certificate of Exemption, or as part of the required data elements to purchase qualifying tangible personal property exempt from sales and use tax.

Additional Information

• Sales and Use Tax Bulletin 29: Fishing, Commercial
• Search the Exemption Certificate Registry

Commercial Logger Exemption Certificate Number

A commercial logger exemption certificate number allows the commercial logger to purchase certain items exempt from sales and use tax.

Who Qualifies?

A commercial logger is a person who for consideration harvests raw forest products for transport to first market. The forest products can be on lands owned by that person or lands where a person has acquired rights to harvest forest products. A qualifying commercial logger includes, but is not limited to, the following:

• A contract-manufacturer. – A person or firm holding a contract with a forest products manufacturer to harvest forest products owned by or to which rights have been acquired by the forest products manufacturer, including the trimming of branches and the cutting of timber to specified lengths or size for the forest products manufacturer.
• A subcontract-manufacturer. – A person or firm that subcontracts the cutting of forest products for a contract-manufacturer under the same conditions as a contract-manufacturer.
• A producer. – A person or firm or its contractor or subcontractor that harvests forest products from lands owned by or for which rights have been acquired by the producer for sale to forest products manufacturers or others.

Application Process

A commercial logger must complete and submit Form E-595EA, Application for Exemption Number for Qualified Purchases, to obtain a commercial logging exemption certificate number. A person engaged in the commercial logging business that is already registered to remit sales and use tax should use the previously assigned sales and use tax account identification number to make purchases exempt from sales and use tax.

Items Exempt from Sales and Use Tax

Purchases of the following by a person engaged in the commercial logging business are exempt from sales and use tax:

• Logging machinery (machinery used to harvest raw forest products for transport to first market). Examples of qualifying logging machinery are log skidders, log carts, tree shears, feller bunchers, grapple skidders, winches, chain saws, tractors, axes, and mallets when such items are used to harvest timber and transport harvested timber to the logging deck.
• Attachments and repair parts for logging machinery.
• Lubricants applied to operate logging machinery.
• Fuel used to operate logging machinery

A commercial logger must provide to a seller their commercial logger exemption certificate number or their previously assigned sales and use tax account identification number on Form E-595E, Streamlined Sales and Use Tax Certificate of Exemption, or as part of the required data elements to purchase qualifying tangible personal property exempt from sales and use tax.

Additional Information

• Sales and Use Tax Bulletin 55: Logging, Commercial
• Search the Exemption Certificate Registry

Wildlife Manager Exemption Certificate Number

A wildlife manager exemption certificate number allows the wildlife manager to purchase certain items exempt from sales and use tax. The exemption certificate number is valid for three years and may be renewed.

Who Qualifies?

A qualifying wildlife manager1 is a person who owns land classified and taxed as wildlife conservation land under G.S. § 105-277.15.

Application & Renewal Process

A wildlife manager must complete and submit Form E-595EA, Application for Exemption Certificate Number for Qualified Purchases, to obtain a wildlife manager exemption certificate number. You must attach a completed Form WM-1, Certification of Classification and Taxation as Wildlife Conservation Land Under G.S. § 105-277.15 to the application. Follow these same procedures to renew your wildlife manager exemption certificate number.

Items Exempt from Sales and Use Tax

Certain items purchased by a wildlife manager and used primarily for wildlife management activities may be exempt from sales and use tax. Also, certain items purchased to fulfill a contract with a wildlife manager or purchased to perform a service for a wildlife manager may be exempt from sales and use tax.

Refer to Sales and Use Tax Bulletin Section 27-9 - Wildlife Managers for a detailed list of items eligible for exemption and how to purchase such items exempt from sales and use tax.

A wildlife manager or other person must provide to a seller the wildlife manager exemption certificate number on Form E-595E, Streamlined Sales and Use Tax Certificate of Exemption, or as part of the required data elements to purchase qualifying tangible personal property exempt from sales and use tax.

Additional Information

• Sales and Use Tax Bulletin 27 - Farmers, Agriculture, and Wildlife Managers
• Search the Exemption Certificate Registry

• 1

  N.C. Gen. Stat. § 105-164.13F(a)(2)

Sales and purchases of wastewater dispersal products approved by the Department of Health and Human Services under Article 11 of Chapter 130A of the General Statutes are exempt from sales and use tax. 

Refer to The North Carolina Department of Health and Human Services website for information on approved products. Questions regarding approved products or the approval process should be directed to the Division of Public Health, On-site Wastewater Protection, NC DHHS.

North Carolina provides exemptions for the purchase of certain items to be located and used at eligible internet datacenters or qualifying datacenters. A datacenter must receive a written determination from the Secretary of Commerce that it is an eligible internet datacenter or a qualifying datacenter prior to making exempt purchases. The definitions of an eligible internet datacenter and qualifying datacenter are found in G.S. § 105-164.3. The exemptions for an eligible internet datacenter are found in G.S. §§ 105-164.13(55) and 105-164.13(55a). 

In addition to the exemptions, eligible internet datacenters and qualifying datacenters must file a quarterly informational report with the Department. The datacenter must report the tax it paid on electricity during the calendar quarter. For additional information, review Important Notice: Repeal of Exemptions for Electricity Used at Datacenters.

Definition of Qualifying Datacenter

A datacenter that satisfies each of the following conditions:

• Wage Standard - The datacenter certifies that it satisfies or will satisfy the wage standard for the development tier area or zone in which the datacenter is located. There is no wage standard for a development tier one area. If an urban progress zone or an agrarian growth zone is not in a development tier one area, then the wage standard for that zone is an average weekly wage that is at least equal to ninety percent (90%) of the lesser of the average wage for all insured private employers in the State and the average wage for all insured private employers in the county in which the datacenter is located. The wage standard for a development tier two area or a development tier three area is an average weekly wage that is at least equal to one hundred ten percent (110%) of the lesser of the average wage for all insured private employers in the State and ninety percent (90%) of the average wage for all insured private employers in the county in which the datacenter is located.
• Investment and Certification - The Secretary of Commerce has made a written determination that at least seventy-five million dollars ($75,000,000) in private funds has been or will be invested by one or more owners, users, or tenants of the datacenter within five years of the date the owner, user, or tenant of the datacenter makes its first real or tangible property investment in the datacenter on or after January 1, 2012. Investments in real or tangible property in the datacenter made prior to January 1, 2012, may not be included in the investment required by this subdivision.
• Health Insurance Standard - The datacenter certifies that it provides or will provide health insurance for all of its full-time employees as long as the datacenter operates. The datacenter provides health insurance if it pays or will pay at least fifty percent (50%) of the premiums for health care coverage that equals or exceeds the minimum provisions of the basic health care plan of coverage recommended by the Small Employer Carrier Committee pursuant to G.S. § 58-50-125.

Definition of Eligible Internet Datacenter

A datacenter that satisfies each of the following conditions:

• Primary Use - The facility is used primarily or is to be used primarily by a business engaged in software publishing included in industry 511210 of NAICS or an internet activity included in industry 519130 of NAICS.
• Land - The facility is comprised of a structure or series of structures located or to be located on a single parcel of land or on contiguous parcels of land that are commonly owned or owned by affiliation with the operator of that facility.
• Location - The facility is located or to be located in a county that was designated, at the time of application for the written determination required under sub-subdivision d. of this subdivision, either an enterprise tier one, two, or three area or a development tier one or two area pursuant to G.S. § 105-129.3 or G.S. § 143B-437.08, regardless of any subsequent change in county enterprise or development tier status.
• Investment & Certification - The Secretary of Commerce has made a written determination that at least two hundred fifty million dollars ($250,000,000) in private funds has been or will be invested in real property or eligible business property, or a combination of both, at the facility within five years after the commencement of construction of the facility.

Exempt Purchases

The purchases exempt from tax depend on the type of datacenter. The exemptions apply to the following:

• Qualifying Datacenter - Datacenter support equipment to be located and used at the qualifying datacenter. Datacenter support equipment is property that is capitalized for tax purposes under the Code and is used for one of the following purposes:
  • The provision of a service or function included in the business of an owner, user, or tenant of the datacenter.
  • The generation, transformation, transmission, distribution, or management of electricity, including exterior substations, generators, transformers, unit substations, uninterruptible power supply systems, batteries, power distribution units, remote power panels, and other capital equipment used for these purposes.
  • HVAC and mechanical systems, including chillers, cooling towers, air handlers, pumps, and other capital equipment used for these purposes.
  • Hardware and software for distributed and mainframe computers and servers, data storage devices, network connectivity equipment, and peripheral components and equipment.
  • To provide related computer engineering or computer science research.
• Eligible Internet Datacenter - Eligible business property to be located and used at an eligible internet datacenter. Eligible business property means property that is capitalized for tax purposes under the Code and is used either:
  • For the provision of a service included in the business of the primary user of the datacenter, including equipment cooling systems for managing the performance of the property.
  • For the generation, transformation, transmission, distribution, or management of electricity, including exterior substations and other business personal property used for these purposes.
  • To provide related computer engineering or computer science research.