Tax Law

Understanding North Carolina's Sourcing Principles (Excluding Telecommunications Sales)

By Martin Silver, J.D., LL.M. (Tax, NYU) -- Law Offices of Martin Silver, P.S., and Adjunct Professor, Tax, Golden Gate University, Seattle® 

General Editor, Jasper L. Cummings, Jr. -- Alston & Bird LLP®


The determination of the taxing jurisdiction where a retail sale occurs for the purpose of imposing the sales and use tax, and for determining whether a retailer is liable for collecting sales or use tax, is referred to as "sourcing." In order to comply with the Streamlined Sales Act, North Carolina has adopted destination sourcing, meaning the sales and use tax is paid to the jurisdiction where the purchaser takes possession of the purchase. This is defined as the place where the purchaser or its delivery agent takes receipt of items purchased. N.C. Gen. Stat. § 105-164.4B contains principles to be used in determining where to source the sale of a product and sourcing principles for periodic rental payments. Very importantly also, destination sourcing determines which county's local sales tax is imposed, and which county, i.e., the county of destination, receives the benefit of the local tax. N.C. Gen. Stat. § 105-467(c) provides that the local sales tax authorized to be imposed and levied applies to taxable transactions by retailers whose place of business is located within the taxing county. The sourcing principles apply in determining whether the local sales tax applies to a transaction. This Insight explains the general principles of sourcing for North Carolina sales and use tax purposes as laid out in the referenced section. Special rules apply to telecommunications services in accordance with N.C. Gen. Stat. § 105-164.4C.  There are also special rules governing the sales and use tax treatment of the delivery of digital goods and services.


The general sourcing principles are based on where possession takes place or where services are first used.

As a full member of the Streamlined Sales and Use Tax Act (SSUTA), North Carolina's sourcing provisions are intended to place it in compliance with the principles enunciated in that agreement. With certain exceptions, most particularly with respect to local taxes, the SSUTA generally provides for destination sourcing for sales and use tax imposition. Prior to implementation of the SSUTA, states found it difficult to develop a consistent set of sourcing rules. In part, this was due not only to the absence of a uniform destination rule, but because the sourcing rules were frequently expressed in terms of "place of delivery." Because the Uniform Commercial Code often mandated different commercial results based on delivery terms, states found that the place of delivery sometimes shifted with the particular delivery terms. N.C. Gen. Stat. § 105-164.4B now expresses delivery in terms of where the purchaser takes receipt of the product, whether it be tangible personal property or service subject to sales tax. Nevertheless, the terms "deliver" and where the buyer takes "receipt" are frequently used interchangeably. The statute does not define the term "delivery," or "receipt," but Section 51-2 of the N.C. Department of Revenue's Sales and Use Tax Technical Bulletin states that for purposes of sourcing, the terms "receive" and "receipt" mean "taking possession of tangible personal property" or "making first use of services." See Sales and Use Tax Technical Bulletin, Section 51-2, available at

Sourcing of sales tax on sales of products is defined  by delivery.

The rules for sourcing of products apply to sales of tangible personal property and taxable services. The statute defines three different delivery situations:

  1. Receipt at seller's  business location;
  2. Receipt at a specific address other than seller's business; and
  3. delivery address unknown.

When a purchaser receives a product at the place of business of the retailer, the tax is sourced to (due in) the jurisdiction where the retailer's business is located. For property shipped to the purchaser at a location specified by the purchaser (other than the seller's location), the sale is sourced to that location, i.e., sourced to the destination. Where the seller does not know the address where the property is received, it is sourced to the first of the following that is known to the seller: the business or home address of the purchaser, the billing address of the purchaser, or the address from which tangible personal property was shipped or from which a service was provided.

Example (1):     B, a North Carolina business, purchases non-inventory tangible personal property from V, an out of state vendor, who has nexus with North Carolina. B picks up the property at V's location out of state. The sale is sourced to V's location, and V does not collect North Carolina sales tax even though V has nexus with North Carolina. B may, however, be subject to North Carolina use tax if the property is used in this state.

Example (2):     Assume the same facts as above, but V delivers the goods to B's business location in North Carolina. The sale is sourced to North Carolina. Since V has nexus with North Carolina it should be registered and collect the sales tax.

Example (3):     Assume the same facts as above, but B has provided the shipper directly with the shipping address which V does not know. However, as they have done business before, V knows B's business address in North Carolina. The sale is sourced to North Carolina under this state's law. The safe course of conduct for V, given its nexus with North Carolina, is to add North Carolina sales tax and remit the tax to this state.

Sourcing of periodic rental payments depends on the location of the leased property.

Leases of tangible personal property may involve property that is leased out of state, brought into North Carolina, and used in North Carolina. Since a lease of tangible personal property is treated as a sale for sales tax purposes, the sales tax being payable when each periodic lease payment is made, the statute provides sourcing principles for leases. Periodic lease payments are sourced in two ways. The first payment is sourced in accordance with the general sourcing principles set out above. Each subsequent payment is sourced to the primary location of the leased or rented property for the period covered by the payment. Leases of motor vehicles or aircraft, unless they are transportation equipment, are sourced the same way as sales of products. If the lease does not provide for periodic payments of rental, i.e. it is payable in a lump sum, the lease payment is sourced the same way as sales of products.


Example:  L, a North Carolina contractor, leases a piece of heavy construction equipment from a dealer in another state. The first lease payment is made at the time the lease is entered into and the payment is mailed to the lessor. The property is delivered to L's yard in North Carolina. L does most of its work in North Carolina but does do some jobs that are out of state and may haul the equipment to the out of state job site. All payments are sourced to North Carolina because that is the primary location of the equipment. The rule regarding the first payment does not produce a different result because the equipment is delivered to a location specified by L, which is in North Carolina.

Exceptions to the general sourcing principles are made for telecommunications services, which are sourced in accord with N.C. Gen. Stat. § 105-164.4C.  In most circumstances, direct mail that does not meet one of these descriptions is sourced to the location from which the direct mail was shipped. In certain circumstances, however, direct mail is sourced to the location where the property is delivered,  These circumstances include where direct mail is purchased pursuant to a direct pay permit, or when the purchaser provides the seller with information to show the jurisdictions to which the direct mail is to be delivered.  The law further provides that florist wire sales are sourced to the business location of the florist that takes an order for the sale.


Special sourcing rules apply to digital goods and services.

In 2009, North Carolina enacted N.C. Gen. Stat. § 105-164.4(a)(6b), which took effect January 1, 2010, and imposes tax on gross receipts derived from certain digital property. Taxable items include: (1) audio works, (2) an audiovisual works; (3) books, magazines, newspapers, newsletters, reports, and other publications; (4) photographs and greeting cards. The general sales and use tax rate applies to digital property that is delivered or accessed electronically, is not considered tangible personal property, and would be taxable under Article 5, Sales and Use Tax, if sold in a tangible medium. The tax applies regardless of whether the purchaser has the right to use it permanently or to use it without making continued payments.

The law defines those items to which the tax applies, and provides a definition pertaining to those items that are delivered or accessed electronically.  In accord with the law, delivered or accessed electronically means delivered to, received by or obtained by the purchaser by means other than tangible storage media. Items that are delivered electronically may be delivery by download, email or other method while accessed electronically is delivery by online access generally accompanied by a password or digital code. The tax on certain digital property does not apply to services that are taxed under the general sales and use tax provisions.

The sourcing of digital property is as follows:

  1. For digital property that a purchaser receives at the seller's business location, the sale is sourced to that business location.
  2. For digital property that a purchaser receives at a location specified by the purchaser that is not a business location of the seller, the sale is sourced to the location where the purchaser receives the digital property.
  3. For digital property that is delivered to a location for which the seller does not know the address, in general the sale is sourced to the first address listed that is known to the seller, with the business or home address of the purchaser being the first location considered, followed by the billing address of the purchaser and the address from which the digital property was provided.

In November 2011, the North Carolina Department of Revenue issued a notice clarifying the sourcing rules that apply to the sale of certain digital property and computer software delivered electronically where the delivery address is unknown and the seller cannot ascertain an address for the purchaser. The appropriate address to which the seller should source the sale is the location from which the digital property or the computer software delivered electronically was first available for transmission by the seller.

RELATED LINKS: For further insights on the Streamlined Sales and Use Tax Act and sourcing principles, see:

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