State and Local Taxation

• Publication year: 2020

State and Local Taxation

Brian Sengson

DiAndria Green

Blake Joiner

David Greenberg

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State and Local Taxation

by Brian Sengson^*

DiAndria Green^**

Blake Joiner^***

and David Greenberg^****

I. INTRODUCTION

This Article surveys the most critical and comprehensive changes in Georgia law occurring between June 1, 2019, and May 31, 2020.¹ Most notably, the article discusses Georgia's tax response to COVID-19, Georgia's new marketplace facilitator statute, the jurisdictional limits of the Georgia Tax tribunal, and other important topics.

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II. Coronavirus Disease 2019 Tax Relief

The Coronavirus Disease 2019 (COVID-19) pandemic created unique tax issues related to employee income tax withholdings, nexus, and property tax. With an almost nationwide shift to a remote workplace, individual taxpayers who live and work in different states need to determine whether they must file a tax return in the work state or the domiciliary state. Businesses must ensure that they are following proper employee withholding laws. Additionally, businesses must determine whether government mandated remote working requirements, with respect to the businesses' employees and business personal property, create or modify nexus for purposes of sales and income tax. Likewise, businesses must also determine whether the presence of company owned equipment being used for income producing activities—such as laptops, monitors, or digital storage devices—modifies their state income tax apportionment ratios or creates local personal property tax filing and payment obligations.

Considering the great uncertainty, the Georgia Department of Revenue (Department of Revenue) provided guidance through its "Coronavirus Tax Relief Frequently Asked Questions" webpage.² The Department of Revenue addressed topics including, but not limited to, nexus considerations, withholding tax obligations, and income tax filing deadlines.³

Mirroring the Internal Revenue Service (IRS), the Department of Revenue automatically granted taxpayers an income tax filing and payment deadline extension for returns due on or after April 15, 2020, and before July 15, 2020.⁴ The extension was available until July 15, 2020.⁵ The extension deadline also applied to estimated income tax payments and "any statute of limitations relat[ed] to claiming prior year income tax refunds" or income tax credits.⁶ Notably, the extension did not apply to sales tax collected or employee withholding amounts.⁷

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Importantly, responding to remote work requirement questions, the Department of Revenue provided that, if an employee's relocation is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic, the Department of Revenue will not use such relocation as the basis for establishing Georgia income tax nexus or, for going beyond the bounds of the federal statutory protections granted by Public Law 86-272.⁸ Additionally, wages earned by an employee temporarily working in Georgia during the COVID-19 pandemic will not be considered Georgia income for Georgia income tax withholdings purposes. Consequently, the Department of Revenue stated that it will treat wages paid to a nonresident employee who normally works in Georgia, but who is temporarily working in a different state, as Georgia wages subject to Georgia income taxes.⁹ However, this guidance is temporary and may not reflect ongoing Department of Revenue policies.¹⁰

III. Georgia Sales and Use Taxation

A. Changes to Georgia's Remote Seller Economic Nexus Law

In the wake of South Dakota v. Wayfair, Inc.,¹¹ Georgia joined many states passing economic nexus laws targeting remote retailers. House Bill 61¹² established an economic nexus test in Georgia.¹³ House Bill 182,¹⁴ effective January 1, 2020, reduced the gross revenue threshold for economic nexus from an amount exceeding $250,000 to an amount exceeding $100,000.¹⁵ The transactional threshold of 200 or more retail sales transactions remains in effect.¹⁶

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B. Georgia Enacts a Marketplace Facilitator Law

The General Assembly enacted House Bill 276¹⁷ creating increased sales tax collection and remittance obligations for taxpayers facilitating taxable retail sales in Georgia. Effective April 1, 2020, any person meeting the definition of marketplace facilitator that facilitates taxable retail sales in Georgia is required to collect and remit sales tax when the aggregate retail sales equals or exceeds $100,000 in the previous or current calendar year.¹⁸

Georgia defines marketplace facilitator as a person that contracts with a seller in exchange for consideration to make available or facilitate a taxable retail sale on behalf of the seller by providing a specifically identified service.¹⁹ Additionally, the person must facilitate payment for the "sale on behalf of the marketplace seller."²⁰ The Georgia legislature expressly defined marketplace seller to include a person conducting a retail sale through any physical marketplace, electronic marketplace, or other "platform operated directly or indirectly by a marketplace facilitator."²¹ Notably, a marketplace facilitator may be facilitating sales on behalf of a marketplace seller regardless of whether the seller is required to maintain a Georgia Dealer's certificate of registration.²² Every person operating as a state-defined marketplace facilitator is deemed to be the dealer and retailer of each retail sale sourced within Georgia.²³

The General Assembly House Bill 276 incorporates a safe harbor provision "for failure to collect and remit the correct amount of [sales] tax."²⁴ Specifically, a marketplace facilitator may be relieved from liability for failure to collect and remit tax if the marketplace facilitator can demonstrate that the "error was due to insufficient or incorrect information" supplied by the seller, and that the "facilitator made a reasonable effort to obtain correct and sufficient information."²⁵ The requisite showing is subjective as the marketplace facilitator must

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demonstrate its efforts to the "satisfaction of the department."²⁶ Exempted from the definition of marketplace facilitator are certain qualifying franchisors, as defined by federal regulation,²⁷ and persons who would otherwise meet the definition of a marketplace seller of such franchisors, provided that, in addition to other factors, the seller "made annual gross sales in Georgia of at least $500 million."²⁸ The legislation prohibits class actions against marketplace facilitators "related to an overpayment of sales or use tax collected on sales facilitated by [a] marketplace facilitator."²⁹ While this exclusion prohibits class actions styled as a tax refund claim, it does not limit a "customer's [individual] right to seek a refund of taxes erroneously paid."³⁰

IV. GEORGIA INCOME TAX

In North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust (N.C. Dep't. of Revenue),³¹ the state governments asked the Supreme Court of the United States to further expand its taxing authority. In rejecting this opportunity, the Court clarified the relationship between the Court's holdings in Quill Corporation v. North Dakota,³² and Wayfair.³³ Joseph Rice formed a series of trusts for the benefit of his children. These trusts were formed under the laws of New York and managed in Massachusetts and Connecticut. One of these trusts was the Kimberley Rice Kaestner 1992 Family Trust (KRK Trust). Under the KRK Trust's terms, the beneficiary lacked an absolute right to the trust assets and had no guaranteed right to income. In 1997, the beneficiary moved to North Carolina. While in North Carolina, the KRK Trust did not distribute any funds to the beneficiary. In 2009, at the discretion of the trustee, the KRK Trust loaned $250,000 to the beneficiary, but the beneficiary repaid the loan. Outside this loan, the KRK Trust did not provide any financial benefit to the beneficiary.³⁴

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North Carolina statute provided if a trust's beneficiary is domiciled within North Carolina then the trust must be subject to income tax on its undistributed income.³⁵ From 2005 through 2008, the KRK Trust paid state income taxes under the management of a new trustee despite making no distributions. In 2009, the KRK Trust filed a request for refund claiming, taxing a Trust income prior to distributing to a beneficiary violated the Due Process Clause and Dormant Commerce Clause. The North Carolina Department of Revenue (North Carolina) rejected their claim for a refund.³⁶ Relying on Quill, the North Carolina Supreme Court held that the statute violated the Due Process clause because the KRK Trust did not personally avail itself to the economic market through the acts of its beneficiary.³⁷ Thirteen days after the supreme court's decision, the Supreme Court of the United States reversed its Commerce Clause holding in Quill.³⁸ Accordingly, North Carolina appealed the decision chiefly arguing the North Carolina's supreme court's formulistic holding should be revised considering the Court's Wayfair decision.³⁹ As such, many practitioners feared the Supreme Court of the United States may further extend state's power to tax out of state actors.⁴⁰

Nevertheless the Supreme Court, reemphasizing its past trust income tax cases, held when a state asserts income tax nexus of a trust based on the in-state residency of the beneficiary, the Due Process Clause requires the resident beneficiary have some possession, control, or enjoyment of the trust's funds for the trust to have sufficient minimum contacts with

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the state.⁴¹ The Court held that the beneficiary's possession, control, and enjoyment over the KRK Trust did not meet the Due...