North Carolina Issues Guidance On Sales And Use Tax Refund Changes For Nonprofit Hospitals

Highlights

• The North Carolina Department of Revenue (NCDOR) has issued Sales and Use Tax Directive 26-3, providing guidance on recent changes to the sales and use tax refund program for nonprofit hospitals.
• Effective July 7, 2026, nonprofit hospital systems and their affiliates are generally treated as a single entity for purposes of the annual refund maximum, consolidating what were previously separate caps for each qualifying entity.
• For the current fiscal year (July 1, 2026, to June 30, 2027), the NCDOR will prorate the refund caps between the pre-effective date period (July 1 to July 6, 2026) and the post-effective date period (July 7, 2026, to June 30, 2027), with updated refund forms and instructions expected by January 1, 2027.

The North Carolina Department of Revenue (NCDOR) issued Sales and Use Tax Directive 26-3 on August 6, 2026, providing guidance on changes to the state's sales and use tax refund program for nonprofit hospitals and clarifying how newly enacted aggregation rules apply to hospital systems and their affiliates.

The directive is particularly important for nonprofit hospital systems that previously claimed refunds through multiple qualifying entities, as those entities must now generally share a single annual refund cap for purchases made on or after July 7, 2026.

The Refund Program for Nonprofit Hospitals

N.C. Gen. Stat. § 105-164.14(b) allows qualifying nonprofit hospitals to claim semiannual refunds of state and local sales and use taxes paid on direct purchases of items used in carrying out their nonprofit activities. The refund also extends to certain sales and use taxes incurred on building materials, supplies, fixtures and equipment incorporated into buildings owned or leased by a nonprofit hospital and used in carrying out its nonprofit activities.

The aggregate annual refund maximums are currently $31.7 million for state sales and use tax and $13.3 million for local sales and use tax. Historically, each qualifying hospital entity within a larger health system could independently claim refunds up to the statutory maximum, meaning that a multi-entity hospital system could collectively receive refunds well in excess of the cap applicable to any single hospital.

What Directive 26-3 Addresses

The General Assembly of North Carolina addressed this structure in the 2026 Appropriations Act, which became law on July 7, 2026. (See S.L. 2026-41, § 44.3.) Also on this date, the NCDOR issued Sales and Use Tax Directive 26-3 to provide guidance on the application of the new law to nonprofit hospital systems and their affiliates:

• Single-Entity Treatment. Effective July 7, a nonprofit hospital system and its affiliates are generally treated as a single entity for purposes of the annual refund maximum. As a result, affiliated hospitals that previously could claim separate refund limits must now share a single, consolidated cap.
• Prorated Caps for the Current Fiscal Year. The state refund maximum is set forth in N.C. Gen. Stat. § 105-164.14(b), and the local refund maximum is set forth separately in N.C. Gen. Stat. § 105-467. Because the new law became effective on July 7, the directive pides the refund maximums for the current fiscal year between two periods:

For purchases made during the July 1 to July 6 period, the prior rules apply, and each qualifying hospital entity is subject to the prorated limits shown above. For purchases made on or after July 7, the new aggregation rules apply, and a nonprofit hospital system and its affiliates generally share the applicable refund maximum.

• Updated Forms and Instructions. NCDOR expects to issue revised refund forms and instructions reflecting the new rules by January 1, 2027. In the interim, affected hospital systems should account for the new aggregation and proration requirements when preparing refund claims.

Holland & Knight Insights

For tax practitioners advising nonprofit hospital systems, the directive raises important practical considerations:

• Compliance and Coordination. Hospital systems with multiple qualifying affiliates will need to coordinate refund claims across the system and separately track qualifying purchases made before and after July 7, 2026, to comply with the applicable refund limits.
• Financial and Strategic Planning. Systems whose affiliates historically claimed substantial refunds under separate entity-level caps should evaluate the financial impact of the new consolidated cap. For systems that reach the cap, sales and use taxes that previously would have been refundable may become an additional cost of major capital expenditures, including construction projects and equipment purchases.