On April 19, Georgia Governor Nathan Deal signed extensive tax reform legislation that phases out sales tax on energy used in manufacturing.1 However, local governments are authorized to impose an excise tax on the sale or use of energy. In addition, effective December 30, 2012,2 the new law enacts a click-through nexus provision by expanding the definition of a "dealer" required to collect and remit sales and use tax to include out-of-state Internet vendors that pay in-state entities in exchange for referrals that result in a certain amount of Georgia sales. Effective October 1, 2012, the definition of a "dealer" is further expanded to include certain out-of-state vendors with in-state affiliates. Finally, separate legislation creates an independent tax tribunal beginning January 1, 2013.3

Elimination of Sales Tax on Energy Used in Manufacturing

Beginning January 1, 2013, an exemption from state and local sales and use taxes on energy that is "necessary and integral to the manufacture of tangible personal property at a manufacturing plant" in Georgia gradually will be phased in over four years.4 The phase, in of the exemption will occur as follows:

  • For transactions occurring in 2013, 25 percent of sales taxes on energy will be exempt;5
  • For transactions occurring in 2014, 50 percent of sales taxes on energy will be exempt;
  • For transactions occurring in 2015, 75 percent of sales taxes on energy will be exempt; and
  • Beginning January 1, 2016, 100 percent of sales taxes on energy will be exempt.6

"Energy" qualifying for the exemption means natural or artificial gas, oil, gasoline, electricity, solid fuel, wood, waste, ice, steam, water, and other materials necessary and integral for the heat, lighting, power, climate control, processing or any other use in any phase of the manufacture of tangible personal property.7 Energy purchased by a manufacturer engaged in producing electricity for resale does not fall under the exemption.

To further promote in,state economic growth, the newly enacted legislation also provides the Commissioner of Economic Development with the discretion to fully eliminate the sales tax on energy for any "competitive project of regional significance."8 A "competitive project of regional significance" is defined as a "location or expansion of some or all of a business enterprise's operations" in Georgia where the Commissioner determines that the project would have a "significant regional impact."9

Local Government Energy Excise Tax Authority

To offset the sales and use tax exemption for energy used in manufacturing, beginning January 1, 2013, a local excise tax on the sale or use of energy is authorized. Municipalities or new "special districts" will be permitted to levy an excise tax on energy used in manufacturing that will be exempt from the sales or use tax under the new law.10 The authorized local excise tax will be gradually phased in as follows:

  • For transactions occurring in 2013, the excise tax will be at a rate of 25 percent of the local sales and use tax in effect in the special district that would be collected but for the sales and use tax energy exemption;
  • For transactions occurring in 2014, the excise tax will be at a rate of 50 percent of the local sales and use tax in effect;
  • For transactions occurring in 2015, the excise tax will be at a rate of 75 percent of the local sales and use tax in effect; and
  • Beginning January 1, 2016, the excise tax will be at a rate of 100 percent of the local sales and use tax in effect.11

Manufacturing Exemptions from Sales Tax Amended and Codified

Effective January 1, 2013, a new statutory manufacturing exemption replaces separate existing statutory exemptions.12 Also, the new statute codifies the regulation that provides the "integrated plant" exemption for manufacturing that was effective January 1, 2009.13 Under the new provisions, the sale of "machinery and equipment which is necessary and integral to the manufacture of tangible personal property," as well as the sale of "industrial materials or packaging supplies," are exempt from sales and use taxes.14 The new statutory provisions codify existing regulatory definitions of relevant terms such as "consumable supplies," "equipment," "industrial materials," "machinery," "manufacture of tangible personal property" and "manufacturer."15 This legislation clarifies and codifies the manufacturing exemptions, but the scope of the exemptions remains largely unchanged.

Sales Tax Nexus

Click-Through Nexus

The new law adds a click-through nexus provision by expanding the definition of a "dealer" required to collect sales and use tax.16 Beginning December 30, 2012, there will be a rebuttable presumption that a "dealer" includes an out-of-state vendor who enters into an agreement with Georgia residents, under which the residents, in exchange for consideration (i.e., commission), refer Georgia customers to the out-of-state vendor and the referrals result in over $50,000 of cumulative gross receipts during the preceding 12, month period.17 This scenario usually applies in the context of online sales made by an Internet vendor lacking a physical presence or location within the state.

Affiliate Nexus

Beginning October 1, 2012, the rebuttable presumption of "dealer" will be broadened to include certain out-of-state vendors with a "related member" (other than a common carrier) who has substantial nexus in Georgia.18 To create the presumption of nexus for the out-of-state vendor, the related member must either sell a similar line of products as the out-of-state vendor under the same or a similar business name or use trademarks, service marks, or trade names in Georgia that are the same or substantially similar to those used by the out-of-state vendor.19

Also beginning October 1, 2012, the term "dealer" will encompass an out-of-state vendor who has another person (other than a common carrier), with substantial nexus in Georgia, engaging in certain activities on the vendor's behalf.20 Specifically, the person with substantial nexus in Georgia will create nexus for the out-of-state vendor if the person: (i) delivers, installs, assembles, or performs maintenance services for the out-of-state vendor's Georgia customers; (ii) facilitates the out-of-state vendor's delivery of property to customers in Georgia by allowing the customers to pick up the property at a place of business maintained by the person; or (iii) conducts any other activities in Georgia that are significantly associated with the out-of-state vendor's ability to establish and maintain an in-state market.21

These presumptions of nexus can be rebutted if the out-of-state vendor demonstrates that it does not have a physical presence in Georgia and that the in-state activities of the Georgia resident or "related member" are not significantly associated with the vendor's ability to establish and maintain a market in Georgia.22

Convention or Trade Show Activities

Effective October 1, 2012, the legislation clarifies the specific types of activities at in-state trade shows or conventions that create nexus for a vendor otherwise lacking a Georgia presence.23 A vendor does not have nexus in Georgia as a result of engaging in conventions or trade shows provided that these activities are the vendor's only physical presence in the state and the vendor, including any of its representatives, does not engage in these activities for more than five days in Georgia during any 12-month period and did not derive more than $100,000 of net income from these activities in the state during the prior calendar year. However, the vendor must collect sales tax on any sale of tangible property occurring at the convention or trade show or made pursuant to an order taken at the event.24

Other Provisions

The new legislation enacts several other significant changes to the Georgia Tax Code, including but not limited to, the following:

  1. A sales and use tax exemption for construction materials purchased for use in the construction of a "competitive project of regional significance" between January 1, 2012 and June 30, 2014;25
  2. A repeal of the sales and use tax and ad valorem tax for cars with titles issued on or after March 1, 2013, as these taxes will be replaced by a state title fee and a local title fee;26
  3. Effective July 1, 2012, the elimination of the film production industry exemption from sales and use tax;-
  4. Effective July 1, 2012, an exemption from 1 percent of the 4 percent state sales and use tax for jet fuel sold to or by a qualifying airline at a qualifying airport;28 and
  5. Effective January 1, 2013, an exemption from sales and use tax for agricultural inputs, energy used in agriculture, and agricultural machinery and equipment when sold to a qualified agricultural producer.29

Formation of Independent Tax Tribunal

On April 19, in addition to signing into law the tax reform package, the governor also signed into law the formation of an independent tax tribunal to resolve taxpayer disputes with the Georgia Department of Revenue.30 Beginning on January 1, 2013, a taxpayer can petition the tribunal in an attempt to resolve a controversy. The tribunal will have a small claims division for tax controversies that do not exceed a certain threshold to be determined by the rules of the tribunal.

Commentary

The tax reform package, according to Governor Deal, is aimed at making "Georgia a better place to run and grow a business."31 For instance, the removal of the state sales tax on energy was part of an initiative to attract at least one major pharmaceutical company that is now expected to deploy significant capital and jobs in Georgia.32

While the manufacturing industry opposes the imposition of local excise taxes on energy used in manufacturing, it should be noted that imposition of such excise taxes must be done by ordinance. Therefore, there is at least some opportunity for the manufacturing industries (and potentially others) to mobilize opposition to any proposed local excise taxes. Without local government action, energy used in manufacturing now exempt at the state level will not be subject to a local excise tax.

The nexus provisions are part of the states' trend to reach untapped revenue from out-of-state vendors. Georgia is expanding its sales tax nexus by enacting both click-through nexus and affiliate nexus provisions. Interestingly, the $50,000 threshold for the click, through nexus provision is much greater than the $10,000 threshold typically included in other states' comparable statutes.

The establishment of an independent tribunal is a continuation of a recent trend by states recognizing that to serve taxpayers' appeals in a fair and efficient manner there is a need for an independent agency, separate and apart from a state tax authority, to resolve disputes between the state tax authority and taxpayers. Note that Illinois also recently has enacted legislation to create an independent tax tribunal.33

In the midst of all these anticipated changes, the state may also soon enact several changes to job incentives and tax credit programs.34 If the bill is signed, or enacted without a signature, the number of industries that qualify for the Job Tax Credit program would be expanded to include businesses engaged in the "manufacturing of alternative energy products for use in solar, wind, battery, bioenergy, biofuel, and electric vehicle enterprises" and "biomedical manufacturing," and the tax credits awarded for new full-time employee jobs would be available for five (rather than four) years.35 Furthermore, an expanded group of business enterprises would qualify for the credit for qualified research expenses,36 the credit for base year port traffic increases would be available to additional businesses,37 and the credit for establishing "new quality jobs" or relocating "quality jobs" would no longer be required to be forfeited in the event that the job is not maintained in a taxable year.38

Footnotes

1 Act 607 (H.B. 386), Laws 2012.

2 The effective date of the click-through nexus provision is uncertain at this time. The legislation provides that the effective date of the click-through nexus provision is 90 days after the effective date of the act. It is not clear whether the 90-day period begins on the date the governor signed the legislation (April 19, 2012), 90 days from the general effective date (October 1, 2012) of the sales tax nexus provisions, or 90 days from the effective date for parts of the act where no effective date is specified (January 1, 2013). We have been advised that the Georgia Department of Revenue is in the process of determining how they are going to interpret this provision. Until the Department offers definitive guidance, we are assuming an effective date of December 30, 2012, which is 90 days after October 1, 2012.

3 Act 609 (H.B. 100), Laws 2012.

4 GA. CODE ANN. § 48,8,3.2(c)(1).

5 The exemption will apply to the 4 percent state sales and use tax rate and any 1 percent local sales and use tax (with the exception of any local 1 percent educational local sales and use tax, often known as "E-SPLOST").

6 GA. CODE ANN. § 48-8-3.2(c)(1).

7 GA. CODE ANN. § 48-8-3.2(a)(2).

8 GA. CODE ANN. § 48-8-3.2(c)(4).

9 GA. CODE ANN. § 48-8-3(92)(D).

10 GA. CODE ANN. § 48-13-112(a).

11 GA. CODE ANN. § 48-13-112(a)(3). Generally, the maximum rate that can be imposed beginning January 1, 2016 is 2 percent. See GA. CODE ANN. § 48-13-112(d).

12 GA. CODE ANN. § 48-8-3.2(b) replaces many of the existing exemptions in GA. CODE ANN. § 48-8-3.

13 GA. CODE ANN. § 48-8-3.2 codifies portions of GA. COMP. R. & REGS. r. 560-12-2-.62.

14 GA. CODE ANN. § 48-8-3.2(b).

15 GA. CODE ANN. § 48-8-3.2(a).

16 GA. CODE ANN. § 48-8-2(8)(M)(i).

17 Id.

18 GA. CODE ANN. § 48-8-2(8)(K).

19 Id.

20 GA. CODE ANN. § 48-8-2(8)(L).

21 Id.

22 GA. CODE ANN. § 48-8-2(8)(K)(ii), (L)(ii), (M)(ii). Sworn statements from the residents that have entered into agreements with the out-of-state vendor may be used by the vendor to rebut the presumption of click, through nexus. See GA. CODE ANN. § 48-8-2(8)(M)(ii).

23 GA. CODE ANN. § 48-8-2(8)(I)(iii).

24 Id.

25 GA. CODE ANN. § 48-8-3(92)(A).

26 GA. CODE ANN. § 48-5B-1(b)(1)(A).

27 Act 607 (H.B. 386), Laws 2012, Part IV, § 4-1, deleting GA. CODE ANN. § 48-8-3(73).

28 GA. CODE ANN. § 48-8-3(33.1)(B)(ii). The thresholds required to be a qualifying airline or qualifying airport are designed to substantially limit the application of the exemption.

29 GA. CODE ANN. § 48-8-3.3(b). Note that H.B. 386 also enacts some changes to the individual income tax system, such as an increase in the personal income tax exemption for married taxpayers and a new cap on the personal income tax retirement exclusion.

30 Act 609 (H.B. 100), Laws 2012.

31 Press Release, Office of Georgia Governor Nathan Deal, April 19, 2012.

32 Id.

33 P.A. 97-636 (S.B. 397), Laws 2011.

34 H.B. 868, sent to the governor for approval on April 3, 2012; if enacted, it would apply to taxable years beginning January 1, 2012.

35 See Sections 1 and 2 of H.B. 868, which would amend the definitions contained in GA. CODE ANN. §§ 48-7- 40(a), 48-7-40.1(a).

36 See Section 3 of H.B. 868, which would amend GA. CODE ANN. § 48-7-40.12(e).

37 See Section 4 of H.B. 868, which would amend GA. CODE ANN. § 48-7-40.15.

38 See Section 5 of H.B. 868, which would amend GA. CODE ANN. § 48-7-40.17.

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