State and Local Taxation
| Publication year | 2020 |
State and Local Taxation
Brian Sengson
DiAndria Green
David Greenberg
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This Article surveys the most critical and comprehensive changes in Georgia law occurring between June 1, 2017, and May 31, 2019.1 In addition to noteworthy cases decided in state and federal courts, this Article details legislation enacted during the survey period that affects Georgia tax law.
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House Resolution 238,2 the Georgia Outdoor Stewardship Act, authorized the Georgia General Assembly to allocate up to 80% of sales tax revenues derived from outdoor and recreational sporting equipment sales to a trust fund used to protect and preserve conservation land.3 Additionally, the General Assembly enacted House Bill 332,4 which provided the mechanism to effectuate the sales tax distributions to the Georgia Outdoor Stewardship Trust Fund.5 The proposed amendment appeared on the 2018 ballot as Amendment 1, and the electorate approved the amendment.6 The new allocation went into effect for transactions occurring on or after July 1, 2019.7
A. New Economic Nexus Requirements
Beginning in 2017, several states enacted statutes or regulations directly challenging the physical presence requirement under the Dormant Commerce Clause8 established in Quill Corp. v. North Dakota9 for states to assert sales tax nexus.10 Notably, South Dakota's statute11 mandated taxpayers without a physical presence in the state collect and remit sales taxes if their in-state sales exceed $100,000 or they have more than 200 transactions in the state.12 Several large online retailers, citing Quill, challenged the constitutionality of South Dakota's statute.13
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On June 21, 2018, in South Dakota v. Wayfair, Inc.,14 the Supreme Court of the United States made two holdings.15 First, the Court held that a state may assert nexus when a taxpayer "'avails itself of the substantial privilege of carrying on [a] business' in that jurisdiction."16 In doing so, the Court acknowledged a fundamental distinction between the country's economic and political borders, noting taxpayers can avail themselves of the privilege of carrying on a business in a state through economic and virtual contacts.17 Second, the Court held South Dakota's economic nexus statute sufficient under the Dormant Commerce Clause.18 The Court identified the following three characteristics of the South Dakota statute as materially determinant, though the individual weight of each characteristic is unknown: (1) the small seller safe harbor based on the sales and transaction thresholds; (2) non-retroactive application; and (3) South Dakota's adoption of the Streamlined Sales and Use Tax Agreement, which presumably reflects reduced compliance costs for business owners.19
Days prior to the Supreme Court's decision in Wayfair, House Bill 6120 established an economic nexus test for remote retailers selling to Georgia customers.21 Effective for sales after January 1, 2019, all businesses with either gross revenue exceeding $250,000 in the current or previous tax year or 200 or more separate transactions in the current or previous tax year must collect and remit sales taxes.22 The provision authorized the Georgia Department of Revenue (Department of Revenue) to bring a declaratory action in any superior court against any remote reseller who failed to collect and remit sales taxes from its customers.23 After Wayfair, effective for transactions on or after
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January 1, 2020, House Bill 18224 lowered the gross revenue requirement to $100,000.25
B. High-Technology Data Center Equipment Exemption
House Bill 69626 created an exemption from sales and use tax for "high-technology data center equipment"27 used in a qualified "high-technology data center"28 beginning July 1, 2018 and ending on December 31, 2028.29 Both the qualified high-technology data center and its customers may apply for the certificate for use for any qualified purchase.30
The exemption is to encourage new quality jobs throughout Georgia.31 Accordingly, high-technology data centers must meet an investment threshold over seven years.32 Georgia law defines the investment threshold as creating twenty new quality jobs and making a local investment based on a population-based tiered system.33 These
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new quality jobs must meet the same requirements as the quality jobs tax credit.34
The Department of Revenue recently adopted regulations to provide additional clarification for the exemption's enforcement and implementation.35 The Department of Revenue began accepting electronic applications for the new exemption certificates on January 1, 2019.36 Once approved, the Department of Revenue provides the high-technology data center a sales tax exemption certificate.37 High-technology data centers must submit their annual report by April 30th of the year the exemption is claimed or will be claimed for the prior year.38
The United States Congress enacted the Tax Cuts and Jobs Act of 2017 (TCJA)39 during the survey period, which radically affected Georgia's income tax laws. Georgia has a "static conformity" provision, which means the state legislature must enact legislation each year to adopt the changes to the Internal Revenue Code (I.R.C.).40 As discussed further below, Georgia's conformity provisions to the TCJA alter Georgia's existing regulations and how taxpayers calculate their state tax burdens.
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A. Georgia Internal Revenue Code Conformity and Decoupling from Certain Tax Reform Provisions
Applicable to tax years beginning on or after January 1, 2018, Georgia conforms to the Internal Revenue Code as of January 1, 2019, with certain exceptions and modifications.41
Georgia has not adopted the 20% qualified business income deduction pursuant to section 199A of the I.R.C.,42 which provides S-Corporations, partnerships, sole proprietorships, and others a reduction in taxable income comparable to the federal reduction in corporate income tax.43
Additionally, Georgia did not adopt sections 163(e)(5)(F)44 and 163(i)(1)45 of the I.R.C., which grant modified rules for high yield, original issue discount obligations.46
Georgia modified the accelerated cost recovery system by excluding certain provisions.47 Specifically, Georgia did not adopt I.R.C. section 168(m),48 which provides a special allowance equal to 50% of a qualified reuse and recycling property's adjusted basis when calculating that property's I.R.C. section 167(a)49 depreciation deduction.50 Additionally, Georgia does not permit the special allowances provided to qualified property under I.R.C. § 168(k).51 Furthermore, Georgia does not use the five-year depreciation life rules for new farming machinery or equipment as defined by I.R.C. § 168(e)(3)(B)(vii).52
Georgia did not adopt the new I.R.C. § 163(j),53 which provided a 30% limitation on business interest and special provisions for electing real property trade or businesses.54 Instead, Georgia continues to comply
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with former I.R.C. § 163(j),55 which only applies to interest paid by certain corporations.56 Accordingly, for Georgia income tax purposes, taxpayers may continue to depreciate their assets regardless of the TCJA's modified I.R.C. § 163(j) and, consequently, are not subject to the alternative depreciation methods under I.R.C. § 168(g).57
Additionally, effective for tax years beginning on or after January 1, 2018, Georgia adopted the increased I.R.C. § 17958 deduction of $1 million and the $2.5 million phaseout.59 This deduction allows taxpayers to treat the cost of "Section 179 Property"60 as an expense not chargeable to the capital account, and thereby, they are allowed to deduct it for the tax year the property is placed in service.61 Nevertheless, Georgia did not expand Section 179 Property to include "qualified real property"62 as provided under sections 179(d)(1)(B)(ii) and 179(f) of the I.R.C.63
B. State and Local Tax Cap Workaround Restrictions Affect Georgia's Existing Tax Credits
One of the more heavily criticized TCJA provisions is the state and local tax (SALT) deduction limitation.64 To detail, individual taxpayers
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are limited to deducting up to $10,000 for state and local income tax paid for the tax years beginning January 1, 2018 through December 31, 2025.65 Considering the ramifications to state residents with high income tax rates, states such as New York, California, and New Jersey, initiated workarounds to the deduction limitation by creating charitable funds for state programs where resident donors would receive a state tax credit for a donation, effectively bypassing the deduction limitation.66
In response to states' workarounds, the Internal Revenue Service released temporary regulations seeking to prevent this workaround.67 The Internal Revenue Service stated, "[W]hen a taxpayer receives or expects to receive a state or local tax credit in return for a payment or transfer to an entity listed in section 170(c), the receipt of this tax benefit constitutes a quid pro quo that may preclude a full deduction under section 170(a)."68 In characterizing these entity level tax credits as quid pro quo, the proposed regulations require pass-through entities to pass the tax credit for federal purposes to the organization's members as a tax deduction subject to the cap.69
Notwithstanding this national debate, prior to the TCJA, Georgia enacted the Pay It Forward Scholarship70 tax credit and Helping Enhance Access to Rural Treatment71 (HEART) tax credit, which provide a tax credit for donors to qualified organizations under the two programs. In application, these credits operate similarly to the other states' SALT limitation workarounds, since both credits can provide an entity level tax credit against Georgia income for donations made by...
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