During the 2021 legislative session, the Georgia General Assembly passed key legislation, including conformity to the federal tax law, the elimination of deference to subregulatory interpretations of the Department of Revenue, the ability for pass-through entities to elect to pay state income tax at the entity level, temporary ad valorem relief for manufacturers, and significant changes to existing income tax credits and sales tax exemptions.
Wednesday, March 31, 2021 was “Sine Die” or the 40th and final legislative day of the 2021 legislative session. Unless indicated as already signed by the Governor, bills passed by both chambers of the General Assembly are transmitted to the Governor, who can sign or veto the legislation within 40 days after the end of the legislative session. If the Governor fails to take any action, the legislation will also become law upon the expiration of the 40-day period.
HB 149 provides that pass-through entities (PTEs) including S-Corporations and Partnerships (including limited liability entities taxed as partnerships) may make an irrevocable election to pay the tax due on income earned by the entity at the entity level at the rate of 5.75%. If a PTE makes this election, shareholders and partners of the PTE would not recognize the flow-through income on their individual returns. The election is only available to a PTE that is 100% directly owned and controlled by natural persons (rather than companies or other entities). The election would become available for taxable years beginning on or after January 1, 2022. According to the fiscal note, the legislation is intended to have no impact on state revenue.
|Eversheds Sutherland Observation: This legislation is similar to legislation passed or proposed in numerous states (such as Arkansas, Connecticut, Louisiana, Maryland, Michigan, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, and Wisconsin), to respond to the $10,000 limitation in the 2017 federal Tax Cuts and Jobs Act imposed on individuals’ state and local taxes (SALT) paid deduction. In 2020, the IRS issued a notice recognizing the full deductibility of state PTEs’ taxes at the entity level for federal income tax purposes notwithstanding the individual SALT cap. See IRS Notice 2020-75, 2020-49 IRB 1453 (Nov. 9, 2020). However, unlike many of the other states’ proposals, this Georgia legislation provides that individuals subtract the PTE income on their individual returns rather than apply a state tax credit for the taxes paid on their behalf by the PTE. This may impact the utilization of certain Georgia income tax credits, such as the credit for donations to Student Scholarship Organizations made by individual partners and shareholders of qualifying PTEs, pursuant to O.C.G.A. § 48-7-29.16.
As a fixed conformity state, the Georgia General Assembly annually passes a conformity bill. On February 24, 2021, the Senate passed the House version of the conformity legislation. The legislation became effective upon the Governor’s signature the same day. As such, HB 265 conforms Georgia’s tax code to the IRC as of January 1, 2021 for taxable years beginning on or after January 1, 2020 with no new decoupling from existing Georgia law. By conforming to the Consolidated Appropriations Act, 2021, dated December 21, 2020, HB 265 resolves any uncertainty as to whether the expenses paid with forgiven Paycheck Protection Program loans would be deductible for Georgia income tax purposes. See also Georgia Department of Revenue Income Tax Federal Tax Changes (updated Feb. 25, 2021).
For the purposes of the local lodging and accommodations taxes, this legislation updates the definition of an “innkeeper” to include marketplace facilitators and extends the statewide $5.00 hotel/motel fee to marketplace facilitators to collect and remit the fee on short-term rental properties. Efforts to centralize the collection and administration of all local lodging and accommodations taxes reporting were unsuccessful this year. The marketplace collection and remittance requirements would become effective July 1, 2021.
HB 451 provides temporary property tax relief to Georgia manufacturers in order to mitigate the economic and logistical disruptions caused by the COVID-19 pandemic. The legislation provides temporary ad valorem property tax relief for manufacturers who have been forced to hold finished goods inventory longer than one year. It does so by calculating the value of inventory of finished goods eligible for the level 1 Freeport exemption on January 1, 2021 based on the eligible inventory amount from either January 1, 2020 or January 2, 2021, whichever the taxpayer elects to use. The bill only applies to calculating the exemption for inventory of finished goods manufactured or produced in Georgia for the 2021 ad valorem tax year and does not apply to other exemptions or other tax years.
HB 593 increases the standard deduction for Georgia taxpayers in the amount of $800 for a single taxpayer or head of household, $550 for a married taxpayer filing separately, and $1,100 for married couple filing a joint return. Governor Kemp signed HB 593 (along with HB 114 which increases an income tax credit for families adopting a child from foster care). The standard deduction increases apply beginning in the 2022 tax year.
Eversheds Sutherland Observation: The 2018 conformity bill lowered the state’s top marginal income rate from 6.00% to 5.75% for 2019 and included provisions to further decrease the rate to 5.50% in 2020 upon approval of the General Assembly and the Governor. This effort was effectively tabled during the 2020 legislative session due to the COVID-19 pandemic. The modest increase of the standard deduction within HB 593 provides similar state income tax relief for those taxpayers who do not claim itemized deductions.
Nevertheless, by increasing the standard deduction, Georgia risks retaining (or obtaining) the entire amount of federal stimulus allocated to the state within the recently passed American Rescue Plan Act of 2021 (HR 1319). The Act prohibits states from using the federal stimulus funds to “either directly or indirectly offset a reduction in the net tax revenue of such State…resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.” See § 9901(c)(2)(A). States are awaiting official clarification from the US Treasury Department regarding the application of this provision.
SB 6 – Tax Credit Return on Investment Act of 2021; Georgia Economic Renewal Act of 2021; Georgia Economic Recovery Act of 2021
This omnibus tax bill combined 3 different pieces of legislation considered this session and added new amendments to several existing credits and exemptions.
The Tax Credit Return on Investment Act of 2021 creates a process for reviewing a handful of tax credits on an annual basis. Specifically, it allows the chairperson of the House Committee on Ways and Means and the chairperson of the Senate Finance Subcommittee to each request an economic analysis for up to 5 current or proposed exemptions, exclusions, deductions, credits, deferrals, rebates, abatements, or preferential tax rates. Each economic analysis, to be performed by the Office of Planning and Budget, would include a 5 year study of the of the direct or indirect impact of the tax provision including: (i) the net change in state revenue; (ii) the net change in state expenditures (including costs of administration); (iii) net change in economic activity; and (iv) if applicable, any net change in public benefit. During the following legislative session, if a fiscal note is requested and a relevant economic analysis was completed, then a summary of the relevant economic analysis must be attached to the fiscal note.
The Georgia Economic Renewal Act of 2021 provides a $1,250 job tax credit for each job created by a medical equipment and supplies manufacturer or a pharmaceutical and medicine manufacturer; provides that excess port tax credits can be taken against a taxpayer’s payroll withholding; removes the cap of 4,500 new full-time on the New Facilities Jobs Tax Credit; enhances the jobs tax credit available to a business enterprise that operates a new high-impact aerospace defense project; and extends a credit related to the maintenance of railroad track owned or leased by class III railroads.
The Georgia Economic Recovery Act of 2021 extends sales tax exemptions for “competitive projects of regional significance” from June 30, 2021 to June 30, 2023; provides a sales tax exemption through December 31, 2022 on sales of tickets, fees, or charges for admission to a museum or fine arts performance or exhibition conducted within a facility that is owned or operated by a 501(c)(3) organization; removes the sunset on the sales tax exemption for energy used as part of a motor vehicle that mixes and transport concrete; and repeals the sunset date for the sales tax cap on certain boat maintenance.
Additionally, the omnibus bill amends the tax credit for qualified research expenses within O.C.G.A. § 48-7-40.12 to provide that a business or headquarters of any such business that otherwise meets the definition of a qualifying business enterprise shall not be considered a (non-qualifying) retail business due the retail activities of its affiliates.
Lastly, the omnibus bill significantly amended the high-technology exemption within O.C.G.A. § 48-8-3(68), which, since 2001, has provided a sales and use tax exemption for high-technology companies that invest at least $15 million in eligible computer equipment in Georgia during a calendar year. The amendments: (i) update the referenced NAICS codes for qualifying company from the 1997 codes to the 2017 codes; (ii) require companies that receive an exemption certificate annually submit to the Department of Revenue a report of the amount of sales tax exempted under this provision within 90 days after the end of the calendar year; and (iii) modify the existing exclusion of “telephone central office equipment or other voice data transport technology” to state that it is “including any wireline or wireless telecommunications system”; and (iv) adds a complete sunset of the exemption on June 30, 2023.
|Eversheds Sutherland Observation: Items (iii) and (iv) directly above attempt to limit and eventually eliminate the applicability of the high-technology exemption and were last minute additions by a legislative conference committee during the final hours of the legislative session without any prior notification or opportunity for public comment. We expect that these will be revisited in future legislative sessions.
Unless otherwise indicated within the legislation, the effective date of SB 6 would be July 1, 2021.
SB 185 allows judges more flexibility in taxpayer dispute cases and frees them from an administrative rule requiring them to defer to certain Department interpretations of ambiguous laws. In particular, SB 185 provides that all questions of law decided by a state court or the Georgia Tax Tribunal, including interpretations of constitutional, statutory, and regulatory provisions shall be made without any deference to subregulatory interpretations, whether written or unwritten, that may have been made by the Department of Revenue. The legislation makes no change to the current level of deference that is accorded (by judicial doctrine) to interpretations of the Department of Revenue within formally promulgated regulations pursuant to the Georgia Administrative Procedure Act. The legislation would apply to tax cases commenced at the Georgia Tax Tribunal or a state superior court after the effective date.
Eversheds Sutherland Observation: These provisions are intended to level the playing field in Georgia tax litigation matters and are similar to measures recently taken in recent years in Arizona, Arkansas, Florida, Mississippi and Wisconsin by legislation, ballot initiative, or judicial ruling. Furthermore, it aligns Georgia with the federal treatment of subregulatory deference. In a 2019 Policy Statement, the United States Treasury and IRS stated that they will no longer argue for Auer or Chevron deference for any administrative guidance other than IRS regulations that are subject to public notice and comment and other statutory rulemaking procedures contained in the federal Administrative Procedures Act.
This legislation is the culmination of several years of work by the Metro Atlanta Chamber and supported by the Coalition to Reform Administrative Deference. It further advances the goal of the Georgia Tax Tribunal to establish an independent forum to settle disputes between a taxpayer and the Department of Revenue.
Bills that did not pass
SB 148 would have created the 2021 Special Council on Tax Reform and Fairness for Georgians and the Special Joint Committee on Georgia Revenue Structure to perform a systematic study of the state’s revenue structure. A similar study was performed in 2010. The proposed Special Council consisted of the Governor or his designee, a nonpartisan policy expert, the National Federation of Independent Business, members appointed by the Lieutenant Governor and the Speaker of the House, the Metro Atlanta Chamber (non-voting), and the Commissioner of the Department of Economic Development or designee (non-voting). The proposed Special Council would conduct a thorough study of the state’s current revenue system during the remainder of 2021, formulate recommendations, and prepare a report. The proposed Special Joint Committee, made up of various legislators, would introduce a package of tax reform legislation during the 2022 legislative session based on the Special Council’s recommendations.
In its original form, HB 594 would have imposed state and local sales tax on all digital goods or services including prewritten software delivered electronically by amending the definition of tangible personal property, subject to sales tax, to include “digital goods or services.” An amended version retained the exemption for prewritten software delivered electronically or via load and leave and for Software as a Service (SaaS) “sold to or used by a commercial enterprise for its commercial purposes regardless of the manner in which the prewritten software is delivered, transferred, or accessed.”