Georgia enacts income tax, sales tax changes

Georgia Gov. Brian Kemp recently approved significant tax legislation making amendments to the state’s corporate income tax law by allowing affiliated groups to file Georgia consolidated corporate income tax returns and advancing the state’s Internal Revenue Code (IRC) conformity date to Jan. 1, 2022. The enacted legislation also implements a flat 5.75% personal income tax rate beginning in the 2024 tax year, with annual phased-in rate reductions planned through 2029. Finally, the legislation extends the sunset date for the sales and use tax exemption related to the purchase of qualified computer equipment by high-technology companies.

Sales and use tax changes

Computer equipment sales tax exemption

Enacted on May 9, 2022, House Bill 1291 amends the exemption from sales and use tax on the sale or lease of any computer equipment to be used by qualifying Georgia high-technology companies as classified by several specific NAICS codes under Georgia law.¹ Significantly, the legislation extends the sunset date for this exemption from June 30, 2023, to Dec. 31, 2028.² In order to be eligible for the exemption, the taxable purchases and leases of equipment must be at least $15 million for any calendar year.³ Effective Jan. 1, 2024, the exemption will be limited such that the purchaser will be required to pay 10% of the total sales and use tax imposed on the first $15 million of purchases eligible for exemption.⁴ Also beginning in 2024, the definition of qualifying computer equipment is amended to exclude computers or devices issued to employees, in addition to prewritten computer software.⁵

House Bill 1291 also extends the sunset date of the sales tax exemption for the purchase of high-technology data center equipment from Dec. 31, 2028, to Dec. 31, 2031.⁶ Effective Jan. 1, 2024, the job creation and investment requirements are modified such that: (i) in counties with a population greater than 50,000, the job creation requirement is increased from 20 to 25 quality jobs (with the minimum investment remaining at $250 million); (ii) in counties with a population between 30,000 and 50,000, the job creation requirement is decreased from 20 to ten quality jobs and the minimum investment is decreased from $150 million to $75 million; and (iii) for counties with a population of less than 30,000, the job creation requirement is decreased from 20 to five quality jobs and the minimum investment decreased from $100 million to $25 million.⁷

Georgia Economic Recovery Act

Enacted on May 10, 2022, the Georgia Economic Recovery Act (House Bill 586) extends the sales and use tax exemption for sales of tickets, fees, or charges for admission to a fine arts performance or exhibition through Dec. 31, 2027.⁸ The bill also reduces the cap on the aggregate amount of conservation tax credits allowed from $30 million to $4 million per calendar year.⁹ This provision is effective from June 1, 2022 through Dec. 31, 2026.¹⁰

Nonrecurring major sporting event ticket sales tax exemption

Enacted on May 2, 2022, House Bill 1034 expands the existing sales tax exemption for sales of admissions to any nonrecurring major sporting events in Georgia that generate over $50 million in the host locality.¹¹ Specifically, FIFA World Cup matches are added to the definition of a “major sporting event,” which also include the Super Bowl, professional sports all-star games, or national collegiate tournament semifinal or final games.¹² The legislation also extends the sales tax exemption from December 31, 2022 to Dec. 31, 2031.¹³

Income tax changes

Elective consolidated filing election for affiliated corporations

Generally, affiliated corporations that are members of the same federal consolidated corporate income tax return are required to file separate Georgia corporate income tax returns unless they elect to file a Georgia nexus consolidated return or have been requested by the Georgia Department of Revenue to file a consolidated return.¹⁴ Under current law, affiliated corporations are required to seek prior approval from the Department to file a consolidated return.¹⁵

Effective Jan. 1, 2023, House Bill 1058 permits affiliated groups filing a federal consolidated return to make a five-year election to file Georgia consolidated returns without advance permission from the Department.¹⁶ The affiliated group filing election is made on an originally filed return, including extensions.¹⁷ Once made by an affiliated group, the election is irrevocable and binding on both the Department and the Georgia affiliated group for five years, at which point the election is automatically terminated.¹⁸ However, the taxpayer may re-elect to file a Georgia consolidated return.¹⁹

For allocation and apportionment purposes, each member of a Georgia affiliated group is considered a separate taxpayer and is required to separately allocate and apportion income on a separate-entity basis.²⁰ A taxable loss of an affiliated group member is deductible against the taxable income of any other group member, only if and to the extent the loss is allocated or apportioned to Georgia.²¹ The separate taxable income or loss of each affiliated group member is included in the consolidated taxable income or loss to the extent that its income or loss is separately apportioned or allocated to Georgia.²² Affiliated groups currently filing on a consolidated basis in Georgia will have the option to terminate their historic election or continue to file on a consolidated basis under the historic rules.²³

General IRC conformity date advanced to Jan. 1, 2022

Enacted on May 2, 2022, House Bill 1320 advances Georgia’s general IRC conformity date from March 11, 2021 to Jan. 1, 2022.²⁴ The updated conformity date applies to all taxable years beginning on or after Jan. 1, 2021. The legislation adopts the provisions of the Infrastructure Investment and Jobs Act (Public Law 117-58) related to the computation of federal adjusted gross income (AGI) or federal taxable income that were enacted on or before January 1, 2022.²⁵

In response to the enactment of House Bill 1320, the Department released updated guidance addressing the impact of the advanced IRC conformity date on Georgia corporate income tax provisions.²⁶ The guidance also provides a summary of Georgia’s conformity to federal income tax changes in the context of another IRC conformity bill enacted earlier in the legislative session, House Bill 7EX. Applicable for tax years beginning on or after Jan. 1, 2021, House Bill 7EX adopts all federal tax provisions, including the American Rescue Plan Act (ARPA), that were enacted on or before March 11, 2021.²⁷ Otherwise, the guidance confirms that the conformity updates do not include any addition or removal of legacy decoupling provisions addressing federal tax provisions including bonus depreciation, interest expense limitations and net operating loss carrybacks.²⁸

Personal income tax rate reduction

Enacted as the Tax Reduction and Reform Act of 2022, House Bill 1437 enacts a flat personal income tax rate structure beginning with the 2024 tax year.²⁹ The legislation eliminates the state’s progressive marginal tax rates and imposes a 5.49% flat personal income tax rate for tax years beginning on or after Jan. 1, 2024, with incremental rate reductions of 0.1% taking place annually until a 4.99% rate is reached during the 2029 tax year.³⁰ The phased-in rate reductions are delayed by one year in the event that certain future revenue estimates and prior year revenue collections are not met by December 1 of each year.³¹ The reduced personal income tax rates do not apply to individual owners of pass-through entities (PTEs) making an election to pay tax at the entity level under Georgia’s PTE tax regime, which instead imposes a flat 5.75% rate.³²

Additionally, the bill combines the existing personal exemption and standard deduction into a larger personal exemption for both single and joint filers.³³ Beginning with the 2024 tax year, single and head of household taxpayers are allowed a personal exemption of $12,000.³⁴ Married taxpayers filing jointly are allowed a personal exemption beginning at $18,500 during the 2024 tax year, with incremental increases up to $24,000 taking place through the 2030 tax year.³⁵ While itemized deductions are retained for federal itemized filers, the legislation makes permanent the addback required for itemized filers deducting state and local taxes subject to the $10,000 SALT cap for federal tax purposes.³⁶

Commentary

Originally set to expire on June 30, 2023, the beneficial computer equipment sales tax exemption for high-technology companies has been extended through Dec. 31, 2028. Beginning in 2024, however, the exemption will be scaled back in that qualifying purchases will specifically exclude employee-issued computers or devices and any prewritten computer software, whether delivered electronically or otherwise. Additionally, taxpayers claiming the exemption will be liable for tax on 10% of the first $15 million of qualifying purchases. Further guidance from the Department is expected as to how this amount of tax will be administered and collected, considering instances of taxpayers making tax-exempt purchases of computer equipment with exemption certificates or the allocation of the tax among local taxing jurisdictions.

The 2022 legislative session saw the enactment of several taxpayer-favorable changes for both corporate and personal income tax purposes. Notably, affiliated groups filing federal consolidated income tax returns may now elect to file Georgia consolidated returns without advance approval from the Department beginning with the 2023 tax year. In cases where the taxpayer previously had Department permission to file as an affiliated group, the taxpayer may elect to continue filing under such approval if desired. The enactment of the new consolidated reporting legislation may require the Department to update its existing consolidated return regulation³⁷ to address open questions such as the treatment of NOL carryforwards, use of credits by the combined group, or whether the election is terminated upon a change in the federal consolidated group. It stands to reason that taxpayers considering whether to enter this elective regime will need to model potential tax consequences prior to entering into this five-year commitment.

Finally, Georgia joins a growing number of states – including Arizona, Iowa and Mississippi – that have recently transitioned to a flat personal income tax coupled with gradual tax rate reductions in order to provide additional taxpayer relief. The transition to a flat personal income tax and lower rates comes at a time when many states continue to experience stronger than expected revenue collections in addition to receiving federal pandemic relief funding allocated by ARPA. It should be noted that the rate reductions do not apply to owners of a PTE that elects to pay Georgia’s PTE tax, which provides for a flat 5.75% tax rate.