Entries in legislation (10)

Tuesday
Apr042017

Lien Law Update: Lien Agent Statutes up for Proposed Revision

Thanks to Connie Wilson for the heads-up...

Senate Bill 602 was filed today.  The bill proposes to make the first significant revisions to the lien agent statutes since they were implemented five years ago.  The stated goal of the bill is to provide for the cancellation of notices to lien agent.

The proposal is positive in the sense that it is entirely permissive.  All of the amendments dealing with cancellation of a notice to lien agent provide that the potential lien claimant "may" deliver a cancellation, and there is no requirement that a potential lien claimant "must" do so.  (As a practitioner's note, the bill uses the term "file" inaccurately, since notices are not filed with the court, but rather are delivered to a title insurer / lien agent.)

However, the fact that the cancellation provisions are permissive does not mean the bill is perfect.  There is language in proposed section 44A-11.2(s) discussing the effect of a cancellation in the event a contractor delivers a subsequent notice.  Under the bill, the new notice "would not relate back to or renew the cancelled filing."  As it is, notices to lien agent automatically "relate back" to the beginning of a project provided there has not been a sale or refinancing of the property.  The same should be true for a new notice -- either the notice is timely with respect to a given sale or refinancing, or it is not.  So subsection (s) needs to clarify that it is in relation to such an event, rather than implying that the effect of a notice is somehow limited in time.

New proposed subsection (t) also suffers from loose language.  The new subsection would automatically cancel a notice after five years "if not cancelled or renewed pursuant to the procedures described in this section."  However, there is no provision for renewal of a notice under current law.  This would need to be cleaned up, or else a new provision for renewing notices will need to be added.

Finally, the bill provides for amending the permitted fee for a designation of lien agent from $25 to $30 for a residential (one- or two-family dwelling) project, and from $50 to $58 for any other project.  Given that the bill's stated intention is to allow for cancellation of notices to lien agent, the cost increase -- which will likely be passed along to the general public -- should be justified at a minimum. 

Watch this space for further developments regarding this bill.

 

Wednesday
Feb242016

NC Iran Divestment Act becomes effective on Feb. 26

The Iran Divestment Act of 2015 was passed with little fanfare last year, and signed into law by the Governor on June 29, 2015.  The Act, codified at N.C. Gen. Stat. 143C-6A-1 et seq., prohibits the North Carolina Retirement Systems and the NC Treasurer from investing funds with individuals or companies engaging in certain defined investment activities in Iran.  The Act also prohibits state agencies, local government units, and other political subdivisions of the State from contracting with individuals or companies on the Treasurer's Final Divestment List.

The Act has an effective date of February 26, 2016, which means that these prohibitions kick in on Friday.  Also on Friday, the Treasurer is expected to publish the Final Divestment List, which is likely to trigger some rapid investigations on the part of state and local agencies before entering into contracts.

Events have also overtaken the passage of the Act, which has made for more significance to the roll-out of the Divestment List.  Last year's multi-national agreement resulted in the January 2016 relaxing of sanctions by the United States and other countries against Iran means that more U.S. companies may be lawfully able to transact business in Iran.  However, by doing so, those companies risk being barred from contracting with public agencies in North Carolina.

For more answers regarding how the NC Iran Divestment Act may affect your business, please call us at 919-828-1396.

Monday
Feb222016

New NC Sales Tax on Services Goes Into Effect March 1

On March 1, 2016, changes to North Carolina’s sales tax laws go into effect, including an expanded application of sales taxes to include “service contracts” and “repair, installation and maintenance services” (“RMI services”).  The following is a summary of the changes, and how they may affect companies in the construction industry:

What is a “service contract?”  A “service contract” is defined as a “contract where the obligor under the contract agrees to maintain or repair tangible personal property, regardless of whether the property becomes a part of or is affixed to real property, or a motor vehicle.”  (N.C. Gen. Stat. § 105-164.3(38b).)  Examples of service contracts include warranty agreements other than a manufacturer’s warranty or dealer’s warranty provided at no charge to the purchaser, an extended warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract.”  (Id.)  Prior to the March 1 change, service contracts for tangible personal property that is or will become a part of real property was not subject to sales tax, unless the service contract was sold by the obligor or by a third party or facilitator at the same time as the item of tangible personal property covered by the service contract.  (former N.C. Gen. Stat. § 105-164.4l(c).)

What are “repair, maintenance, and installation services?”  RMI services are activities defined in the 2015 Appropriations Act (HB 97) as those services to: (1) keep or attempt to keep tangible personal property or a vehicle in proper working order so as to avoid the property from breaking down or needing repair; (2) calibrate, restore, or attempt to calibrate or restore tangible personal property or a vehicle to proper working order or to a good condition including replacing or putting back together broken parts; (3) troubleshoot, identify, or attempt to identify the source of a problem in order to determine what must be done to restore the tangible personal property or the vehicle to its proper working condition or a good condition; and (4) install or apply tangible personal property, except for tangible personal property installed or applied by a real property contractor pursuant to a real property contract.  (N.C. Gen. Stat. § 105-164.3(33d).)

In addition to defining RMI services, the bill expands the definition of a “retailer” to include a person who “is engaged in business of delivering, erecting, installing, or applying tangible personal property fur use in this State, regardless of whether the property is permanently affixed to real property or other tangible personal property,” unless this person solely operates as a real property manager or if the person is one whose only business activity is providing repair, maintenance, and installation services where the person’s activities do not otherwise meet the definition of a “retail trade.”  (N.C. Gen. Stat. § 105-164.3(35)(b).)  A “retail trade” is defined in the amendments as a trade where a majority of revenue comes from retailing tangible personal property, digital property, or services to consumers.  The term also includes maintaining an inventory and may include the provision of repair, maintenance, and installation services.  (N.C. Gen. Stat. § 105-164.3(35b).)

Where have the changes occurred?  The privilege tax imposed upon retailers engaged in business in the state has been expanded to apply the 4.75% rate to the sales price of or the gross receipts derived from repair, maintenance, and installation services.  (N.C. Gen. Stat. 105-164.4(a)(15).)  The retail sales tax statute was also amended to exclude from taxation “[r]epair, maintenance, and installation services provided for an item for which a service contract of the item is exempt from tax under G.S. 105-164.4I,” and “[r]epair, maintenance, and installation services purchased for resale.”  (N.C. Gen. Stat. § 105-164.13(61a), (61b).)   In addition, “repair, maintenance, and installation services used to maintain or repair tangible personal property or motor vehicle pursuant to a service contract taxable under this Article if the purchaser of the contract is not charged or the item” are also exempt from the retail sales tax.  (N.C. Gen. Stat. § 105-164.13(62).)

How do the changes affect construction firms?  To figure out whether a construction firm is required to collect sales tax for RMI services requires parsing the various new definitions and how they apply to the company’s business.  There are four different categories of business operations which could conceivably apply to a particular construction business.  Those are:

(1) “Real property contractor” – This is defined as “a person that contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real property and to furnish tangible personal property to be installed or applied to real property in connection with the contract and the labor to install or apply the tangible personal property that becomes part of real property. The term includes a general contractor, a subcontractor, or a builder for purposes of G.S. 105‑164.4H. The term does not include a person engaged in retail trade.”  (N.C. Gen. Stat. § 105-164.3(33a).

(2) “Retailer” – This is defined as a person engaged in business of making, offer, or soliciting sales at retail “of tangible personal property, digital property, or services for storage, use, or consumption in this State.”  (N.C. Gen. Stat. § 105-164.3(35)(a).)  It also covers a person “engaged in business of delivering, erecting, installing, or applying tangible personal property for use in this State, regardless of whether the property is permanently affixed to real property or other tangible personal property unless” the person is a person that solely operates as a real property contractor, or a person whose only business activity is providing repair, maintenance, and installation services where the person's activities do not otherwise meet the definition of a retail trade.  (N.C. Gen. Stat. § 105-164.3(35)(b).)

(3) “Retailer-contractor” – This is defined as a person that acts as a retailer when it sells tangible personal property at retail and as a real property contractor when it performs real property contracts.  (N.C. Gen. Stat. § 105-164.3(35a).)

(4) “Retail trade” – This is defined as “a trade in which the majority of revenue is from retailing tangible personal property, digital property, or services to consumers. The term includes activities of a person properly classified in NAICS sector 44‑45, buying goods for resale, and rendering services incidental to the sale of merchandise. The term typically includes maintaining an inventory and may include the provision of repair, maintenance, and installation services. Not all activities provided in this subdivision are required for a trade to be considered retail trade.”

The easiest category to figure out for application of the new sales tax is the real property contractor.  A company that only performs “construction, reconstruction, installation, repair, or any other service with respect to real property” is effectively exempted from having to charge and collect the new sales tax for its construction-related services, because those businesses do not fit the definition of a “retailer.”  However, the converse is also true – a business engaged in a retail trade cannot be treated as a real property contractor under the sales tax statutes.  The statute specifically cites to the NAICS (North American Industry Classification System) retail trade sector codes 44 and 45, which apply to companies “engaged in retailing merchandise, generally without transformation, and rendering services incidental to the sale of merchandise.”  Construction companies typically are classified under NAICS sector 23.

The greatest points of confusion affect the two categories of services:  service contracts, and RMI services.  According to the NC Department of Revenue, the sale of service contracts is taxable, even if sold by a real property contractor.  (See N.C. DOR Notice regarding sale or renewal of service contracts dated Feb. 2, 2016.)  The Department detailed examples including an HVAC company selling a service contract, and a garage door retailer selling a service contract.  For the garage door example, the Department wrote:

On March 1, 2016, a retailer engaged in business in North Carolina makes a retail sale of a service contract on a garage door installed in a customer’s home in North Carolina.  The retailer collects sales tax on the sales price of the service contract.  On March 31, 2016, the customer’s garage door requires service covered by the service contract.  The obligor arranges for repair services and is charged $250.00 for parts and installation by a garage door retailer.  The obligor provides Form E-595E to the garage door retailer to purchase the parts and installation exempt from sales and use tax and does not charge the purchaser of the service contract for the parts and installation.

(Id., p. 2.)  In relation to that or similar situations, the Department notes that purchases of items or RMI services to maintain or repair tangible personal property pursuant to service contract subject to the new sales tax should be exempted from those taxes (so as to avoid double taxation) by giving a properly completed Form E-595E exemption certificate to the seller.  (See id.)

Finally, there is the determination of whether a construction company qualifies as a “retailer-contractor,” in which case the retailing operations are subject to the sales tax provisions, and the real property contracting operations are not.  The test used there is the “majority of revenues” standard from the definition of “retail trade” under Section 105-164.3(35b).  According to the Department of Revenue, a business who is not in the retail trade sector can meet the definition of “retail trade” if a majority of its revenue is from retailing tangible personal property, digital property, or services to consumers in the State.  (See N.C. DOR Directive SD-16-1, pg. 4.)  According to Directive SD-16-1, a kitchen remodeling company with $2 million in cumulative revenue, with $1.5 million from kitchen remodeling contracts and $500,000 from retail sales of kitchen cabinets, is deemed to have received 75% of its revenue from the “real property contracting” activities, and 25% of its revenue from the retail sales, and could therefore be a “retailer-contractor.”  (See id., p. 5.)

What do construction companies do now?  This article is not intended to give legal advice or tax advice to any reader regarding how much a construction company is required to charge or withhold in sales tax beyond what it presently does.  Any company doing business in North Carolina should retain experienced counsel who can review the new laws and advise the company on how its particular business will be affected by the changes.

That said, there are some general conclusions that can be drawn for all contractors:

1.     Any business that sells or furnishes service contracts other than a manufacturer’s or dealer’s warranty, will need to account for those contracts and charge sales tax to customers.

2.     A company engaging solely as a real property contractor is largely unaffected by the changes, because the “repair, maintenance, and installation services” definition excludes the installation or application of tangible personal property by a real property contractor pursuant to a real property contract.  (See N.C. Gen. Stat. § 105-164.3(33d)(d).)  This applies to both installation and repair services, so long as the property being serviced is affixed to the real property.  (See N.C. Gen. Stat. § 105-164.3(33a).)

3.     Any business that both sells materials to be installed by its own workers, and sells materials that may be utilized or installed by the customers or others, needs to keep extra care with its records, especially if the split between the sales and the installation work gets close to the 50% threshold.  Once the majority of revenue comes from retail sales, the company may automatically tip into being defined into the “retail trade.”

For further questions regarding how House Bill 97 may affect your business, please call us at (919) 828-1396 to set up an appointment.

Wednesday
Jul082015

H482 Article Update

On Wednesday, June 17, 2015, the House Committee for Commerce and Job Development heard and voted on the committee substitute for House Bill H482, the Employee Fair Classification Act.  As stated in the previous blog post on this issue, the House Bill created a task force, and the Senate version created a division within a pre-existing Department of State Government, the Office of State Budget and Management.  The committee substitute for H482 has changed that.

What exactly has changed from the original House Bill?  Essentially, the new House Bill looks very similar to the Senate Bill.  Discussed below are the specific changes from the original to the committee substitute, which is now being pursued in the House of Representatives.

The definition of Employee is now any individual that is defined as an employee by either G.S. 95-25.2(4), 96-1(10), 97-2(2), or 105-163.1(4). The definition of employee does not include an independent contractor or an individual or entity where the individual or entity provides transportation services and trucking equipment as an owner-operator under written contract as referenced in 49 C.F.R. Part 376 et seq. to a common carrier, or exempt hauler.

The bill now creates the Employee Classification Division, not a task force focused on investigating and educating on employee misclassification. The Employee Classification Division is located within the Department of Revenue and the Secretary of the Department of Revenue now appoints the Director of the Division.  Rather than being its own entity, it is now located within an existing Department of State Government.

The Division is no longer in charge of establishing training modules and materials pertaining to the investigation and enforcement of incidents of employee misclassification for use by State agency investigators and law enforcement agencies. Instead, the Division is dedicated fully to investigation, implementation, and prevention of employee misclassification.

The House Bill now contains language regarding general contractors, plumbing and heating contractors, electrical engineers, vendors, applicants, and owners. Regarding General Contractors under Chapter 87 of the North Carolina General Statutes, a general contracting license may be revoked upon a finding that “a penalty was imposed pursuant to G.S. 143-765(b)[, the statutes regarding employee misclassification penalties,] that has been upheld upon final adjudication, the violation giving rise to the penalty was willful, and there was no good faith argument that the individual was an independent contractor.” The licensing board for general contractors shall publish guidelines governing the suspension and revocation of licenses including references to the prohibition of employee misclassification where they also state that employee misclassification violations are grounds for license revocation.

Regarding plumbing and heating contractors under G.S. 87-23, the licensing board may revoke any plumbing, heating, or fire sprinkler contractor, or any combination thereof, “if a penalty was imposed pursuant to G.S. 143-765(b)[, the statutes regarding employee misclassification penalties,] that has been upheld upon final adjudication, the violation giving rise to the penalty was willful, and there was no good faith argument that the individual was an independent contractor.”

Regarding electrical engineers under G.S. 87-43, the statute prohibits specifically willfully engaging in employee misclassification in violation of 143-765(b) where there was no good faith argument that the individual was an independent contractor. The licensing board may also conduct audits of pay and project records of licensee firms in order to establish compliance with worker classification laws.

Regarding G.S. 143-59.2(a) for vendors a vendor is deemed ineligible if within five years prior to the date of the solicitation of a bid, the vendor has been assessed a civil penalty pursuant to G.S. 143-765(b)[, the statutes regarding employee misclassification penalties,] that has been upheld upon final adjudication, the violation giving rise to the penalty was willful, and there was no good faith argument that the individual was an independent contractor.

Regarding G.S. 153A-134 and G.S. 160A-194 for applicants, an applicant that is subject to regulation and licensure by a county or a city must certify to the city or county of application that the applicant has read and understands the employee misclassification notice as required under G.S. 143-763(a)(7). Finally, regarding G.S. 153A-460 and G.S. 160A-420 for owners, an owner must certify to the county or city of application that the owner has read and understands the employee misclassification notice as required under G.S. 143-763(a)(7).

Essentially, the committee version of H482, which is being pursued, is closer aligned to the Senate Bill as far as its effects on the construction industry than it is to the original House Bill. The definition of independent contractor and the provisions regarding civil penalties appear to be the same as the original. However, now, on top of the civil penalties for violation of employee misclassification prohibitions, general contractors may lose their licenses and/or be fined up to five thousand dollars for violation of a provision of the licensing requirements, now including willfully misclassifying employees. Similarly, electrical engineers and heating and plumbing contractors, too, may lose their licenses on top of the civil penalties imposed by the Division.

The legislation appears to give more power to the licensing boards to have access to project and pay records of these licensees to better find out whether there are instances of employee misclassification. Similarly applicants and owners must now give notice and acknowledge their understand and have read the new employee misclassification guidelines, further confusing the role of general contractors who may also serve as either an owner or an applicant, or both.

It is important to note that the bill sponsor, Representative Pendleton, represented to the Committee on Commerce and Job Development that Senator Newton stated that he wished for the Senate Bill to die in committee, and the House Bill to be the bill pursued for dealing with employee misclassification. Senator Newton is the sponsor for the Senate Bill.  The committee substitute to H482 is currently in the House Judiciary II Committee and will be heard at one of their future meetings. The Judiciary II committee meets on Tuesdays at 1:00 pm.

Wednesday
Apr162014

Prequalifications study committee adopts recommendations

Created as an important part of House Bill 857 -- which created uniform design-build and public-private partnership methodologies for North Carolina public construction -- the Purchase and Contract Study Committee met today and adopted a report recommending new limits and procedures to improve prequalification requirements for state and local projects.  Rep. Dean Arp and Sen. Neal Hunt led the committee during several contentious meetings to the unanimous adoption of the report, which should be published to the committee's website shortly.

The key aspect of the proposal would amend Section 143-135.8 of the North Carolina General Statutes to prescribe prequalification rather than broadly authorizing the practice.  Prequalification would be permitted in the future only for bid work, based on a publicly-adopted objective policy by the governmental agency.  The policy must be "uniform, consistent, and transparent in its application to all bidders," must allow all bidders who meet the criteria to be prequalified to bid on the work, and must clearly state the criteria, which must be rationally related to the work, not require that the bidder have previously worked for the governmental entity, and permit bidders to submit history or experience with projects of similar size, scope or complexity.  The policy would also have to include a protest process for non-prequalified bidders, so any aggrieved party could have the non-prequalification decision reviewed before the bid opening.  Prequalification would not be permitted by government entities for any qualification-based services.

Another element, which received a strong amount of debate, added a requirement that governmental entities must report before proceeding with a construction manager at risk project that using CM-at-risk is in the best interest of the project, and that the entity has compared the cost and benefit of using the method in lieu of other delivery methods.

The report will now be delivered to the General Assembly for consideration during the 2014 short session.