On May 2, 2023, Georgia Governor Brian Kemp approved omnibus tax legislation that advances the state’s adoption of the Internal Revenue Code (IRC), decouples from IRC Sec. 174 concerning the treatment of research and experimental (R&E) expenditures, and reinstates a standard deduction for personal income tax purposes.1 Also, the legislation imposes a sales and use tax on specified digital products, other digital goods, and digital codes for transactions occurring in 2024 and thereafter. Finally, the legislation creates a sales and use tax exemption for internet access services.
Income tax changes
IRC conformity and decoupling from IRC Sec. 174
For taxable years beginning on or after Jan. 1, 2022, Georgia’s general IRC conformity date is advanced from Jan. 1, 2022 to Jan. 1, 2023.2 The legislation expressly decouples from IRC Sec. 174 and adopts this provision as in effect before the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA).3 Prior to the TCJA, taxpayers were allowed the option to currently deduct R&E expenditures or treat such expenditures as deferred expenses to be capitalized and amortized over their useful life. As amended by the TCJA, for amounts paid or incurred in tax years beginning in 2022 and thereafter, all taxpayers are required to capitalize R&E expenditures over a five-year period for domestic expenses and 15 years for foreign expenses. Georgia expressly decoupled from this treatment for tax years beginning on or after Jan. 1, 2022, allowing for an immediate deduction of R&E expenditures.
Other than the provision concerning IRC Sec. 174, this conformity update does not include any addition or removal of legacy decoupling provisions addressing federal income tax provisions including bonus depreciation, interest expense limitation and net operating loss carrybacks.
Personal income tax
Technical amendments were made to the personal income tax rate reduction enacted last year.4 The 2022 legislation provided for a flat personal income tax rate structure beginning in 2024, with a 5.49% flat personal income tax rate for tax years beginning in 2024, and incremental annual rate reductions of 0.1% until a 4.99% rate is reached for tax years beginning in 2029 and thereafter. However, the rate reductions are delayed by one year if certain future revenue estimates and prior year revenue collections are not met. As recently amended, the rate is reduced by 0.1% annually beginning on Jan. 1, 2025, until the rate reaches 4.99%.5 The statute no longer includes the exact tax rate for each year during the phasedown. Also, the legislation enacted last year combined the existing personal exemption and standard deduction into a larger personal exemption beginning with the 2024 tax year.6 The recent legislation repeals these provisions and again provides a standard deduction. For tax years beginning or after Jan. 1, 2024, a taxpayer must decide whether to take the standard deduction or subtract the itemized nonbusiness deductions used in computing federal taxable income.7
Sales and use tax changes
Tax imposed on specified digital products, other digital goods and digital codes
For transactions occurring on or after Jan. 1, 2024, sales and use tax is imposed on the retail purchase or retail sale of specified digital products,8 other digital goods,9 or digital codes10 sold to an end user in Georgia, provided that the end user receives or will receive the right of permanent use of the item and the transaction is not conditioned upon continued payment by the end user.11 The tax applies regardless of whether possession is maintained by the seller or a third party.12 In general, this tax will be levied, collected, remitted and administered in the same manner and at the same rate as the sales and use tax on tangible personal property.13 The legislation also adds a new related provision concerning sales for resale. Specifically, a sale of any specified digital product, other digital good, or digital code is considered a sale for resale if the item is subsequently sold, licensed, leased, broadcast, transmitted, or distributed, in whole or in part, as an integral, inseparable component part of a service or another such product, good, or code by the purchaser to an ultimate consumer.14
Exemptions for internet access service, electronically delivered prewritten computer software
Effective Jan. 1, 2024, a sales and use tax exemption is added for internet access service.15 Existing law provided for an exemption for the sale of prewritten software delivered to the purchaser by means of load and leave.16 As amended, the exemption applies to the sale of prewritten computer software transferred electronically to the purchaser or delivered to the purchaser by means of load and leave, but the exemption excludes the sales of specified digital products, other digital goods or digital codes.17
Commentary
Georgia’s enactment of legislation to decouple from IRC Sec. 174 and reinstate the law in effect prior to the TCJA should be favorable for many taxpayers with significant activity in Georgia and large R&E expenditures. As discussed above, effective for tax years beginning after Dec. 31, 2021, the TCJA amended IRC Sec. 174 to require R&E expenditures to be deducted over a period of five years (domestic research) or 15 years (foreign research). Prior to 2022, taxpayers could fully deduct all R&E expenditures as incurred. This change has garnered considerable attention. There is a possibility that this federal law could be amended, but there has not been much progress in amending IRC Sec. 174 to date. Many taxpayers are adversely affected by the change to IRC Sec. 174 because they are no longer able to immediately expense R&E expenditures that frequently are very significant. As a result, states adopting IRC Sec. 174 as it existed prior to the TCJA may provide a significant state tax benefit to taxpayers.
Other states have enacted legislation to decouple from IRC Sec. 174 during the past 14 months. In March 2022, Tennessee expressly decoupled from this federal change by enacting legislation to adopt IRC Sec. 174 as it existed immediately before enactment of the TCJA.18 Besides Georgia, other states such as Indiana19 and Mississippi20 have decided to decouple from IRC Sec. 174 during their 2023 legislative sessions. Taxpayers with a significant presence in these states should consider the immediate deduction of R&E expenditures.
Georgia is following the lead of many states that have decided to impose sales and use tax on certain digital products and goods. The tax is expected to generate over $80 million in state and local revenue during the 2024 fiscal year and is projected to increase to nearly $200 million for the 2028 fiscal year.21 Because the tax only applies if the end user receives the right of permanent use of the item that is not conditioned upon continued payment by the end user, the tax does not apply to rentals or subscription access.22 Taxpayers should carefully consider the new statutory definitions and determine whether their transactions are subject to this tax. If their sales are taxable, they should ensure that they are ready to implement their procedures for collecting the tax and remitting it to the state for transactions occurring on or after Jan. 1, 2024.
1 Act 236 (S.B. 56), Laws 2023.
2 Ga. Code Ann. § 48-1-2(14).
3 P.L. 115-97 (2017).
4 H.B. 1437, Laws 2022, amending Ga. Code Ann. § 48-7-20. For a discussion of this legislation, see GT SALT Alert: Georgia enacts income tax, sales tax changes.
5 Ga. Code Ann. § 48-7-20(a.1), (a.2).
6 H.B. 1437, Laws 2022, amending Ga. Code Ann. § 48-7-26(b).
7 Ga. Code Ann. § 48-7-27(a)(1). The standard deduction equals the following amounts: (i) for a married couple filing a joint return, $24,000; or (ii) for a single taxpayer, head of household, or married taxpayer filing a separate return, $12,000. If a taxpayer elects to deduct the itemized nonbusiness deductions, the taxpayer is entitled to a $300 credit for tax years beginning on or after Jan. 1, 2024. Ga. Code Ann. § 48-7-27.1.
8 A “specified digital product” means the following items transferred electronically to an end user: (i) digital audio-visual works; (ii) digital audio works; or (iii) digital books. Ga. Code Ann. § 48-8-2(34.1)(A). “Digital audio-visual works” are any series of related images, together with accompanying sounds, of any and which, when shown in succession, impart an impression of motion. Ga. Code Ann. § 48-8-2(11.2). “Digital audio works” are digitized works that result from the fixation of a series of musical, spoken or other sounds. Ga. Code Ann. § 48-8-2(11.3).
9 “Other digital goods” means the following items transferred electronically to an end user: (i) artwork; (ii) photographs; (iii) periodicals; (iv) newspapers; (v) magazines; (vi) video or audio greeting cards; or (vii) video games or electronic entertainment. Ga. Code Ann. § 48-8-2(20.05).
10 “Digital code” means a key, activation, or enabling code that conveys a right to obtain one or more specified digital goods or other digital goods. The term does not include a code that represents a stored monetary value that is deducted from a total as it is used by the purchaser or a redeemable card, gift card, or gift certificate that entitles the holder to select specified digital goods or other digital goods of an indicated cash value. Ga. Code Ann. § 48-8-2(11.4).
11 Ga. Code Ann. § 48-8-30(a)(2)(A). “End user” is any person other than a person that receives by contract a product transferred electronically for further commercial broadcast, transmission, licensing, distribution, or exhibition of the product, in whole or in part, to another person or persons. Ga. Code Ann. § 48-8-2(15.1).
12 Ga. Code Ann. § 48-8-30(a)(2)(B).
13 Ga. Code Ann. § 48-8-30(a)(2)(C). Georgia generally imposes a state sales and use tax at a rate of 4%. Ga. Code Ann. § 48-8-30(b)(1).
14 Ga. Code Ann. § 48-8-38(f). The purchaser of the specified digital product, other digital good, or digital code for resale must maintain records that substantiate the resale.
15 Ga. Code Ann. § 48-8-3(90). Georgia adopts the federal definition of “internet access service” as provided by 47 U.S.C. § 151, note (Internet Tax Freedom Act). Ga. Code Ann. § 48-8-2(16.05). Under this federal law, “internet access services” means a service that enables users to access content, information, electronic mail, or other services offered over the internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. The term does not include telecommunication services, except to the extent such services are purchased, used, or sold by a provider of internet access to provide internet access.
16 Ga. Code Ann. § 48-8-3(91).
17 Id.
18 S.B. 2397, Laws, 2022, amending Tenn. Code Ann. § 67-4-2006(a), effective for tax years beginning on or after Jan. 1, 2022.
19 On May 4, 2023, Indiana enacted legislation, S.B. 419, adding Ind. Code § 6-3-2-29. Beginning with the 2022 tax year, this legislation decouples from IRC Sec. 174 and allows taxpayers to deduct all specified R&E expenditures in the current year.
20 On March 27, 2023, Mississippi enacted H.B. 1733, amending Miss. Code Ann. § 27-7-17(1)(f). Under this legislation, which expressly decouples from IRC Sec. 174 for tax years beginning in 2023 and beyond, taxpayers in Mississippi may immediately deduct R&E expenditures that are paid or incurred in connection with their trade or business. This deduction is allowed notwithstanding potential prospective federal changes that are related to the depreciation of R&E expenses. Taxpayers alternatively may elect to follow the R&E depreciation provisions under IRC Sec. 174.
21 Fiscal Note for H.B. 170, Georgia Department of Audits and Accounts, March 16, 2023. Note that H.B. 170 was incorporated in S.B. 56.
22 Id.
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