2013 IPT SALES TAX SYMPOSIUM (MONTEREY, CA) Clark Calhoun, Alston & Bird LLP UPDATES ON GEORGIA LEGISLATION, REGULATIONS, AND CASE LAW

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1 2013 IPT SALES TAX SYMPOSIUM (MONTEREY, CA) Clark Calhoun, Alston & Bird LLP UPDATES ON GEORGIA LEGISLATION, REGULATIONS, AND CASE LAW I. LEGISLATION A. HB 100 ( Georgia Tax Tribunal Act of 2012 ) 1. New Independent Forum for State Tax Disputes HB 100 created the Georgia Tax Tribunal, which serves as a new independent and autonomous division within the executive branch s Office of State Administrative Hearings. Taxpayers began filing petitions to the Tribunal on January 1, Judge and Jurisdiction Judge Charles Beaudrot is the first judge of the Tax Tribunal. He was appointed by the Governor under the provisions of the bill, which requires the appointee to be an expert in state tax law with experience practicing primarily in the area of tax law for at least eight years. The Tribunal has concurrent jurisdiction with the state superior courts over actions for tax refunds, appeals of orders, rulings, or findings of the commissioner of revenue, and determinations regarding the legality of writs of execution issued by the commissioner of revenue for the collection of any tax, penalty or interest. According to the Tribunal s rules, the Tribunal may not determine that a statute is unconstitutional, but it can hear evidence regarding a constitutional claim for purposes of appeal. 3. Rules of Practice and Procedure The Georgia Civil Practice Act, which governs discovery and depositions, applies to Tribunal proceedings, although the parties are encouraged to conduct discovery informally. Trials in Tribunal proceedings are de novo and without a jury. Tribunal judges are generally required to apply the rules of evidence as applied in the trial of civil non-jury cases in the superior courts, with the exception of hearings conducted in the Tribunal s small claims division. All decisions of the Tribunal (other than Small Claims decisions) are required to be written and published. 4. Appeals Final judgments of the Tribunal may be appealed to the Superior Court of Fulton County. Such review must be conducted by the reviewing court without a jury and on the record. The reviewing court may reverse or modify the judgment if substantial rights of the petitioner have been prejudiced. The reviewing court s final judgment may be appealed to the Court of Appeals or Supreme Court of Georgia in keeping with the

2 normal rules governing discretionary and direct appeals under O.C.G.A and B. Publication of Letter Rulings HB 846 authorized the commissioner of revenue to promulgate regulations regarding the publication of written tax rulings. As in most states, published rulings do not have precedential value for any taxpayer other than the one to which the ruling is addressed, but the publication of such rulings along with the creation of the Tax Tribunal should help the state to expand on its thin body of existing guidance for taxpayers. To this point, the Department has published only a small number of rulings on its website pertaining to income tax credits and real estate transfer taxes. C. Energy Exemption (O.C.G.A et seq.) In 2012, the General Assembly passed a major bill that overhauled the sales/use tax exemptions for manufacturers and created new exemptions for energy used in manufacturing and/or agricultural operations. In connection with that exemption from state sales/use taxes on energy, however, the General Assembly also authorized counties and cities to impose a self-administered local excise tax on energy used within a local jurisdiction. If enacted, the excise tax must be phased in over 4 years, up to a maximum tax of 2%. At a recent public meeting of the Georgia Department of Revenue, a representative stated than more than 30 localities have elected to impose the excise tax on energy. However, at least one Georgia county (Banks County) has already voted to rescind its local tax because the tax was harming its ability to attract business to the area. In 2013, the General Assembly enacted HB 250, which amended various provisions of the Georgia Code pertaining to the local energy excise tax that was authorized by HB 386 in Excise Tax Deduction HB 250 allows a deduction from the amount of the local energy excise tax due for dealers that make timely payment of such taxes. This deduction is equal to 3% of the combined total amount of all excise tax that is due from the dealer to each governmental authority imposing the tax, computed on a monthly basis, up to $3,000, and 0.5% of any such amount over $3,000. The term dealer is defined as any person who sells energy at retail, offers to sell energy at retail, or has in his or her possession any energy for sale at retail. Exemption for Competitive Projects of Regional Significance - 2 -

3 HB 250 also provides that the local energy excise tax does not apply to the sale or use of energy associated with the construction of a competitive project of regional significance, applicable until June 30, To qualify as a competitive project of regional significance, a project must involve the location or expansion of a business s operations in Georgia, and the commissioner of economic development must determine that it will have a significant regional impact. Assessments HB 250 establishes a three-year statute of limitations for assessment of additional local energy excise tax, unless the dealer or purchaser knowingly or willfully evaded the tax (in which case there is no statute of limitations on such assessment). In addition, a dealer or purchaser may file a refund claim within three years of paying the tax. HB 250 also prohibits a jurisdiction from employing a contract auditor on a contingency fee basis to audit a dealer or purchaser with respect to its potential local energy excise tax liability. Returns HB 250 sets forth guidelines for filing local energy excise tax returns. In particular, a dealer must transmit returns and remit the tax for the preceding month on or before the twentieth day of the current month to each taxing jurisdiction (although such jurisdictions are authorized to allow quarterly or annual returns, and the dealer may apply in writing for a 30-day extension). A dealer that has an estimated tax liability for a period in excess of $2,500 is required to file estimated tax returns and pay at least 50% of the tax on or before the 20th day of such period. There is at least one company seeking to administer the local excise taxes for a number of Georgia jurisdictions (similar to Revenue Discovery Systems in Alabama), but as of this time, the author is not aware of any administrator that has a multi-jurisdiction contract in place. Penalties and Interest HB 250 establishes various penalty and interest provisions applicable to the local energy excise tax, similar to those that would apply to sales and use taxes. D. Changes to New Motor Vehicle Tax Scheme (O.C.G.A. 48-5C-1 et seq.) In 2012, the General Assembly overhauled the taxation of motor vehicles in Georgia by enacting HB 386, which exempted the sale of motor vehicles from sales and use tax, ended the annual ad valorem property tax on motor vehicles, and imposed a new one-time motor vehicle title fee ad valorem tax (O.C.G.A. 48-5C-1). These changes were viewed as generally positive for both individuals and businesses in Georgia, and - 3 -

4 they recently went into effect on March 1, However, HB 386 had several flaws, including its failure to extend the sales and use tax exemption to leased motor vehicles. Thus, a leased vehicle was subject to both the title fee and sales tax on the monthly lease payments. HB 266 corrected this disparate treatment by extending the sales/use tax exemption to leased motor vehicles. HB 266 also made several other changes to the new title fee ad valorem tax, such as amending the definition of fair market value of the motor vehicle, which is the basis for the tax, to provide different guidelines for new and used vehicles (including provisions that explicitly reference leased vehicles). E. Invest Georgia Fund (O.C.G.A et seq.) HB 318 created the Invest Georgia Fund as a distinct component of the previously established Seed-Capital Fund (O.C.G.A et seq.). The Invest Georgia Fund is intended to increase the amount of private investment capital available to Georgia-based businesses that require funding at the seed, early, or growth stage of development and which require funding, as well as for established Georgia-based businesses developing new methods or technologies, thereby increasing employment, creating additional wealth, and otherwise benefitting the economic welfare of Georgia. In order to accomplish these intended goals, HB 318 authorizes the Invest Georgia Fund to make investments in support of Georgia-based businesses in accordance with a stated investment policy, focusing such policy principally on venture capital funds and private equity organizations that invest in Georgia-based businesses. The Invest Georgia Fund will be administered by the newly created Invest Georgia Board, consisting of three members appointed by the governor, one member appointed by the lieutenant governor, and one member appointed by the speaker of the House of Representatives. The fund will be capitalized through grants from the Seed-Capital Fund, designated appropriations to the Georgia Advanced Technology Development Center, and private contributions to the Invest Georgia Board. Contributed capital must be allocated 40% among the early stage venture capital funds, and 60% among the growth stage venture capital funds. F. Sales, Use, and Excise Tax Exemptions 1. Property Used to Maintain or Repair Aircraft HB 164 extended the sunset provision of the sales and use tax exemption for engines, parts, equipment, and other tangible personal property used in the maintenance or repair of aircraft (O.C.G.A (86)), which was previously set to expire on June 30, 2013, until June 30, Notably, the exemption continues to apply only when the engines, parts, equipment, and other tangible personal property are installed on such 1 Purchasers of a motor vehicle between January 1, 2012 and March 1, 2013 were able to choose to either remain under the old annual ad valorem scheme or to opt in to the new one-time title fee

5 aircraft that is being repaired or maintained in Georgia so long as such aircraft is not registered in Georgia. 2. Sales to Job Training Organizations HB 193 created a new sales and use tax exemption, beginning on July 1, 2013 and ending on June 30, 2015, for sales of tangible personal property and services to qualified job training organizations. In order to be qualified, a job training organization must (i) be located in Georgia; (ii) be a 501(c)(3) entity; (iii) specialize in the retail sale of donated items; (iv) provide job training and employment services to individuals with workplace disadvantages and disabilities; and (v) use a majority of its revenues for job training and placement programs. The Department of Revenue must also provide the organization with an exemption determination letter. 3. Motor Fuel Sold to Public School Systems HB 211 exempts sales of motor fuel to public school systems in Georgia from the state motor fuel excise tax, when such fuel is paid for by the school system for its exclusive use in operating school buses. This exemption would be applicable beginning July 1, 2013, and ending June 30, Sales to Zoological Institutions HB 318 extended the sunset provision of the sales and use tax exemption for tangible personal property used for and in the renovation or expansion of zoological institutions located in Georgia. Previously, this exemption expired on June 30, As a result of HB 318, the exemption is in effect from July 1, 2013 until June 30, Refunds for Expansions of Existing Tourist Attractions HB 318 also amended sections of the Georgia Code regarding sales and use tax refunds related to tourism attractions (O.C.G.A to -276). HB 318 extended the availability of this refund to expansions of existing tourism attractions (it previously applied only the new projects). The bill also changes the refund structure by making the refund available in each year of the 10-year agreement with the Department of Community Affairs for both new and expansion projects, in an amount equal to the lesser of the annual sales tax (or incremental sales tax, for expansion projects) or 2.5% of the total approved costs incurred prior to January 1 of the year in which the refund claim is being filed. In addition, HB 318 requires the commissioners of economic development and community affairs rather than the governor to approve applications for the refund, and it allows local jurisdictions to grant similar refunds of local sales and use tax at their discretion

6 G. Employment Compliance (OCGA , , ) For service contracts for labor or services exceeding $2,499.99, all public employers and their contractors at every level must use the federal work authorization program, which is an electronic verification of employment eligibility system commonly known as E-Verify. The bill provides an exception for contract services provided by individuals who are licensed pursuant to Title 26 or Title 43 of the Georgia Code, or by the State Bar of Georgia. H. Other Economic Development Bills of Note 1. Extension of Investment Tax Credit HB 318 extended the income tax credit for qualified investments in a qualified business (O.C.G.A ) to 2014 and This credit was set to expire at the end of Clarification Related to Motor Fuel Excise Tax The motor fuel excise tax is imposed at the rate of 7 1/2 per gallon of motor fuel sold or used in Georgia (O.C.G.A ). The statute specifies that the gallon equivalent of compressed natural gas shall be not less than 110,000 British thermal units. However, the statute previously did not contain a similar provision for liquefied natural gas. HB 371 amends the statute to specify that the gallon equivalent of liquefied natural gas shall not be less than 6.06 pounds. HB 371 also defines liquefied natural gas as methane or natural gas in the form of a cryogenic or refrigerated liquid for use as a motor fuel. 3. Freeport Exemption The General Assembly added a second level to the existing freeport exemption for ad valorem taxation. This level 2 freeport exemption covers all items of business inventory including retail inventories for sale in Georgia, which were not previously eligible for exemption which would not otherwise qualify for the existing freeport exemption, which is now designated level 1. A taxpayer must obtain written approval from the governing tax authority to claim the level 2 exemption, after the county or municipal voters approve the availability of such exemption via referendum. Once approved, the governing authority by resolution must determine whether to exempt 20%, 40%, 60%, 80%, or all of the value of taxpayers inventories. Level 2 freeport exemptions may be granted either in lieu of or in addition to level 1 freeport exemptions

7 4. Research Expense Credits HB 266 amends the income tax credit for research expenses (O.C.G.A ) to make clear that the withholding tax offset provision, which was enacted by HB 868 in 2012, would only apply to credits earned on or after January 1, This provision is applicable retroactively to all taxable years beginning on or after January 1, Thus, a business that had created research expense credits in years prior to 2012 and carried forward such credits to 2012 and subsequent years would not be able to utilize such credits against its withholding tax liability. Prior to this amendment, there was a strong argument that carried-forward credits could be used against withholding. 5. Resale Certificates HB 266 revised the standards associated with a vendor s acceptance of a resale certificate (O.C.G.A ). Previously, accepting a resale certificate relieved a vendor from the burden of proving that a sale was for resale (or otherwise exempt) and therefore not taxable, provided that the resale certificate was properly completed and that the vendor obtained it within 90 days after the sale. HB 266 reestablished the good faith standard, under which the resale certificate must be both properly completed and taken in good faith. This good faith requirement was previously removed from the Georgia Code effective January 1, HB 266 explains the circumstances under which a resale certificate may be taken in good faith. For example, the certificate is taken in good faith if it claims an exemption that is (a) available on the date of the transaction; (b) that could be applicable to the item being purchased; and (c) that is reasonable for the purchaser s type of business. In addition, in order for the resale certificate to relieve the vendor from collecting the tax, the purchaser must be engaged in the business of selling tangible personal property and have a valid sales tax registration number at the time of purchase, and the vendor must have no reason to believe that the purchaser does not intend to resell the item in its regular course of business. Finally, HB 266 also removes language allowing a vendor to accept a resale certificate after the transaction has occurred. I. Tax Credits 1. Research Tax Credit Where the amount of the research tax credit exceeds 50 percent of the business enterprise s remaining Georgia net income tax liability after all other credits have been applied in a taxable year, the excess credit can be used against payroll withholding. Previously (for years beginning on or after January 1, 2009), only a newly-formed business enterprise within the first five years of its existence could utilize excess credit against withholding. As amended, the statute allows any business enterprise to utilize the credit against withholding

8 2. Jobs Tax Credit The General Assembly amended the jobs tax credit in 2013 to add the manufacturing of alternative energy products for use in solar, wind, battery, bioenergy, biofuel, and electric vehicle enterprises and biomedical manufacturing to the definitions of a business enterprise and existing business enterprise so that more businesses are eligible to receive jobs tax credits. It also changed the job creation requirement for a tier 1 county from five jobs to two jobs and extended the number of years for which additional job tax credits can be claimed from four to five and allowed excess additional job tax credits to be carried forward for 10 years. 3. Quality Jobs Tax Credit The General Assembly deleted subsection (f) of section , which provided that a taxpayer that has failed to maintain a new quality job in a taxable year forfeits the right to the credit claimed for such job in that year. For each year the new quality job is not maintained, such taxpayer is liable for all past income taxes for that taxable year and all past withholding payments that were foregone by the state as a result of the quality jobs tax credits. The amendment also removed the requirement that a job must not have a predetermined end date in order to be a new quality job. 4. Film Tax Credit The General Assembly made various changes to the film tax credit, including the following: Specified that the term production expenditures shall not include postproduction expenditures for footage shot outside of Georgia, marketing, story rights, or distribution. Changed the definition of qualified Georgia promotion to specify that it includes a qualified movie production which includes a five-second long logo that promotes Georgia in the end credits and which includes a link to Georgia on the project s web page. Such term also includes a qualified TV production which includes an embedded five-second long Georgia promotion during each broadcast worldwide and which includes a link to Georgia on the project s web page. Changed the definition of qualified production activities to include video on demand, direct to DVD, digital platforms designed for the distribution of interactive games, and advertiser supported sites as part of multimarket commercial distribution. Specified that instead of including a Georgia promotional logo, the production company may offer alternative marketing opportunities to be evaluated by the Georgia Department of Economic Development to ensure that they offer equal or greater promotional value to the state of Georgia

9 II. REGULATIONS A. Rule (Prescription Drugs, Samples of Prescription Drugs, Medical Equipment) This amended regulation, which became effective on Nov. 19, 2012, addresses the sales and use tax treatment of drugs, durable medical equipment, prosthetic devices, and other medical items to conform to the Streamlined Sales and Use Tax Agreement. Among other things, the amended rule defines all of the relevant terms ( drug, durable medical equipment, mobility enhancing equipment, prosthetic device, and overthe-counter drug ) and clarifies the rules with respect to each type of product. In general, although the sale of prescription drugs is always tax-free, the purchase of durable medical equipment, prosthetic devices, or mobility enhancing equipment by a medical supplier is not exempt unless such equipment is transferred to a patient pursuant to a prescription. If a prescription is required for the equipment by state or federal law, the provider does not need to furnish a resale certificate to its supplier. However, if a prescription is not required, the service provider must furnish a resale certificate. Unlike prescription drugs, the sale of over-the-counter drugs is always taxable (even if made on the recommendation of a doctor). The same rule applies to the sale of eyeglasses and contact lenses (i.e., they are exempt if dispensed pursuant to a prescription). Free samples of lenses are also exempt so long as they are not intended for resale and are labeled as such. B. Proposed Rules and (Manufacturers) These two proposed rules proposed to amend the existing provisions applicable to the sales/use exemption for manufacturers to conform to the statutory changes enacted in 2012 s HB 386. The Department proposed a number of conforming changes in the fall of 2012 (see Notice SUT ) but has not yet formally promulgated them. The regulations echo the integrated plant theory codified by HB 386; they also add definitions and provisions related to the expanded exemptions for packaging materials in a manufacturing operation and energy used in manufacturing. C. Informational Bulletin SUT (eff. 1/1/13) This informational bulletin provided guidance regarding applying for, receiving, and providing the required Georgia Agriculture Tax Exemption (GATE) certificate for qualifying agricultural purchases after Jan. 1, Pursuant to HB 386 and O.C.G.A , agricultural producers must apply to the Georgia Department of Agriculture for a GATE certificate to make exempt purchases of machinery, equipment, energy, and other inputs for use in their agricultural operations. While the Department of Agriculture is the gate-keeper (no pun intended) for purposes of approving exempt vendors, the Georgia Department of Revenue retains the exclusive authority to audit and/or assess such vendors

10 Agricultural producers must renew their GATE certificates each year with the Department of Agriculture. III. CASE LAW A. Georgia Power Co. v. Cazier, 740 S.E.2d 458 (Ga. Ct. App. 2013) Here, the Georgia Court of Appeals dismissed the attempt of a group of utility customers to bring a class action suit against Georgia Power for allegedly overpaid sales taxes. While Georgia law permits customers to seek a refund from their vendors and then file a claim for refund with the Department if the vendor rejects the claim, there is no such provision for the customers to file an action directly against the vendor in court. Furthermore, Georgia law explicitly prohibits class actions for tax refunds. B. Sherman v. Development Authority of Fulton County, 740 S.E.2d 663 (Ga. Ct. App. 2013) Here, the Georgia Court of Appeals vacated the trial court s approval of the issuance of bonds by the county development authority because the trial court had not properly made specific findings of fact and conclusions of law as to the validity (or invalidity) of the valuation method that would be used for the leasehold estate transferred in connection with the bonds. Pursuant to a common bond structure, the county development authority had valued the leasehold estate granted to the developer using a ramp-up valuation method, in which the leasehold was taxed at 50% of its fair market value in year 1 and then ramped up to 100% over the course of the lease term. Because the trial court had not correctly analyzed whether the valuation method used by the county satisfied statutory and constitutional standards, the case was remanded for a re-determination using the proper standards