Local Sales Tax
The local sales tax applies to most of the goods and services currently taxed through the state sales tax. (One exception is food purchases, which are taxed at a local rate of 2 percent, but are not taxed at the state level.) Counties can increase their local sales tax by one-quarter of a penny (or 0.25 percent) if county voters approve of the increase by referendum. The ballot cannot say how the funds will be used, but county commissioners can adopt a resolution that describes how it plans to use the revenues. In NC, only Durham County has resolved to allocate some of the funds raised through a local sales tax to early childhood education.
How Does it Work?
Local sales taxes in North Carolina are set at the county level, and every county has a local tax rate of at least 2 percent. This local tax is added on to the state sales tax rate of 4.75, so total sales taxes are at least 6.75 percent across the state. Every county has the option of raising local sales taxes to 2.25 percent if the increase is approved by county voters.
A small number of urban counties — Durham, Forsyth, Guilford, Mecklenburg, Orange, and Wake — also have the option to increase local sales taxes by an additional 0.5 percent in order to fund public transit. The 0.5 percent transit sales tax also needs to be approved by county voters through a referendum.
As of 2020, only Durham and Orange counties have approved both the transit sales tax and the quarter-cent increase, for a total 2.75 percent local sales tax rate. Mecklenburg and Wake counties have approved the transit sales tax alone and have a 2.5 percent rate. Another 44 counties have approved a quarter-cent increase, while the remaining 52 have the minimum local rate of 2 percent. From 2018 to 2020, 47 county referenda were held to increase the local rate to 2.25%, and 15 of those passed.
Who Collects it?
The North Carolina Department of Revenue oversees the collection of local sales tax revenue. The Department then allocates funds to counties and municipalities (towns and cities) depending on where the sales took place.
What is it Used for Now?
By state law, the local sales tax provides general operating support for local government services. Some examples of these are parks and recreation, waste management, water supply, and police and fire services. Nationwide, local sales taxes provide about seven percent of local governments’ annual general revenue.
In North Carolina counties are not allowed to define in law a specific use for the local sales tax — for example, a county could not pass a policy saying that funds can only be used to fund NC Pre-K expansion. However, county governments can, and some have, adopted resolutions that identify the purposes for which they seek voter approval to raise the local sales tax. A resolution is a key tool for early childhood advocates to secure a public statement on the use of revenue for early childhood investments.