- Associated Press - Monday, February 29, 2016

RALEIGH, N.C. (AP) - New sales taxes on car repairs and other services take effect this week as part of Republican efforts to reduce the state’s reliance on income taxes in favor of those based on consumer transactions.

Starting Tuesday, the sales taxes will be charged on labor for a number of services by retailers ranging from installing cabinets and flooring to repairing jewelry and shoes. Previously, such businesses generally charged tax on parts but not on labor.

Combined state and local taxes will amount to around 7 percent on the transactions, but the rate will vary by county.

Many car repair shops are worried the added tax could cause customers to put off repairs, said Robert Pulverenti, executive director of the Independent Garage Owners of North Carolina.

“There are only so many dollars in a consumer’s pocketbook today, and the economy is still weak. People are still counting pennies and dollars, so the shops are very concerned about it,” he said.

The GOP-led General Assembly approved the expansion of the sales tax last September in the two-year state budget, which was also signed by Republican Gov. Pat McCrory. Part of the millions of dollars in new revenue will be redistributed to small and rural counties.

Republicans have argued that a broader package that includes the changes reduces taxes overall for residents. The budget law cut the individual income tax rate starting in 2017 and raised standard deductions starting this year.

Sen. Bob Rucho, R-Mecklenburg, said Monday that that the income tax changes will benefit workers with each paycheck. The sales tax on a car repair, meanwhile, may only occur a couple of times a year, he said.

The additional sales tax is “more than offset with the amount of personal income tax savings,” said Rucho, co-chairman of the Senate Finance Committee. Rucho said the sales tax expansion is part of a yearslong effort to shift the state’s revenue base from one that relies on income tax to one that relies on consumption-based taxes.

Democrats and their allies, however, have said the expanded sales tax will hurt families that have less disposable income.

“The additional sales taxes are nothing more than a veiled lower-to-middle income tax increase,” state Sen. Dan Blue of Wake County, the Senate’s Democratic leader, said in a news release. “Car and home repairs are stressful and much more costly to lower income families that pay a higher percentage of their income toward these expenses.”

The North Carolina Retail Merchants Association has been working with its members to help them understand the law, said spokeswoman Christie Burris.

The new taxes apply to businesses defined as retailers that provide the repair, maintenance or installation services. They aren’t charged for transactions by certain building contractors or businesses that only provide maintenance or repair without fitting state criteria for the retail industry.

For example, a person who works as a knife-sharpener but doesn’t sell knives or other goods wouldn’t be liable for the tax, according to Department of Revenue documents. The state also said pest control or garage-door repairs wouldn’t incur the tax as long as the providers don’t meet the definition of a retailer.

It’s not clear how hard it will be for business owners to learn the nuances of the law and adjust their cash registers and computer systems, Pulverenti said.

For example, garages will generally charge the tax for car repairs, but not state emissions tests. Pulverenti also said the tax will be applied to towing in some cases, but not others.

“That’s going to be a mess and crazy for people to understand,” he said.

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