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GEORGIA SALES AND USE TAX


By: Charles R. Beaudrot, Jr.
Michael J. Rhim
Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, N. E.
Atlanta, Georgia 30326
Telephone: (404) 233-7000
Facsimile: (404) 365-9532
crb@mmmlaw.com

VI. APPLICATION OF SALES AND USE TAXES TO PARTICULAR BUSINESSES AND TAXPAYERS - SPECIAL ISSUES AND EXEMPTIONS

A. Introduction.

The determination of sales and use tax liability generally turns on whether the transaction in question is a sales transaction versus a service transaction or whether the property involved is tangible personal property versus intangible personal property. Even if the transaction in question involves the retail sale of tangible personal property, liability from sales and use tax may still be avoided if one (1) of the seventy-two (72) statutory exemptions contained in the Code applies.

B. Airplanes/Airlines Charters.

  1. Purchase of Aircraft for Business or Personal Use. As discussed elsewhere in today’s program, Georgia sales tax is designed to impose tax upon the ultimate consumer of tangible personal property, regardless of whether the ultimate consumer uses the tangible personal property for business or personal use. Thus, persons who purchase aircraft for business or personal use must generally pay Georgia sales tax on the cost of the aircraft. Although O.C.G.A. § 48-8-3(33)(A) provides an exemption for the sale of certain aircraft, this exemption only applies to aircraft which will be used principally in the interstate transportation of passengers or cargo by common carrier.

    Purchasers of aircraft often attempt to avoid payment of sales tax since aircraft are typically high ticket items which generate substantial sales tax liability. Moreover, purchasers often purchase their aircraft from an out-of-state seller in which sales tax is not collected and often fail to realize that the corresponding "use" tax is triggered when the aircraft is subsequently brought into Georgia.

    In view of the reluctance of many purchasers to pay sales tax on aircraft purchases, the Sales Tax Division has established a special group to enforce compliance in this area. As one means of enforcement, the group monitors the Federal Aviation Administration aircraft title system located in Oklahoma City, Oklahoma. Any Georgia resident who records in Oklahoma City his purchase of an aircraft can typically expect to receive a notice from the Sales Tax Division within a few weeks of purchase.


  2. Collection of Tax by Seller. The Seller of an aircraft, the delivery of which takes place in Georgia, is generally required to collect sales tax from a purchaser who will use the aircraft for business or personal use. In order to avoid this collection obligation, sellers often demand that the delivery of the aircraft to the purchaser take place in a state which imposes nominal or no sales tax in connection with the sale of an aircraft. For example, North Carolina and Delaware exempt aircraft from their general sales tax laws and impose only a minimal sales tax. Sellers generally accomplish delivery in a state such as North Carolina by flying the aircraft to such state, delivering title documents to the purchaser at the airport into which the airplane has flown and if possible transferring funds to the seller before the airplane returns to Georgia.


  3. Payment of Use Tax. Of course, an aircraft purchaser cannot avoid tax simply by closing in a foreign state. Upon the first use of the aircraft in Georgia, the purchaser is subject to a "use tax" which is imposed in the same manner and amount as sales tax. As with sales taxes, the use tax is generally due on or before the twentieth (20th) day of the month following the month of purchase.


  4. From the purchaser’s standpoint, the consequence of taking delivery of an aircraft in a foreign state is the deferral of payment of tax until the twentieth (20th) day of the month following the month of purchase. If the purchase price is large, even this short deferral can be beneficial to the taxpayer.


  5. Purchase of an Airplane by a Dealer.
    1. Tax Exempt Purchase. Airplane dealers may avoid payment of sales tax upon the purchase of aircraft by purchasing under a certificate of exemption. Airplane dealers are subject to the rules generally applicable to dealers.


    2. Definition of an Airplane Dealer. Reg. § 560-12-2-.04 of the Sales and Use Tax Regulations defines airplane dealers as:
      An aircraft sales and service dealer is engaged in the business of purchasing aircraft and related property solely for resale or rental and not for use in providing any services such as crop dusting. Such dealers should purchase tax-free such aircraft, accessories, tires, repair parts, fuels and lubricants for resale under certificates of exemption. Such certificates do not include property not purchased for resale, and such property is taxable at the time of purchase.
    Although this definition appears relatively clear on its face, a difficult issue often arises in distinguishing aircraft dealers who lease aircraft from aircraft service operators who provide aircraft transportation services. As will be addressed in more detail below in the discussion regarding charter services, the proper categorization is critical since the former is exempt from sales tax and the latter is not.

    The ability of a dealer to purchase aircraft free of sales tax carries with it a substantial charge if the dealer uses the aircraft in a capacity other than as a dealer. Reg. § 560-12-2-.04(2)(a) provides that:
    The Act provides that if a purchaser who purchases under a certificate of resale makes any use of the property other than retention, demonstration or display while holding it for resale in a regular course of business, the use is taxable. Liability is computed by applying the tax rate to the cost of the property except where the dealer exercises the permitted options listed below under Section (3). Unless the dealer exercises the options permitted, the tax computed on cost price will accrue on his first use but not on any subsequent use. In addition, receipts from such uses and any subsequent retail sale of the aircraft may also be taxable. For example, if an aircraft dealer makes a personal or business use of the aircraft, the dealer becomes liable for the tax on the cost of the aircraft. If the aircraft cost the dealer $10,000.00, the dealer’s liability would be $400.00. If there is a subsequent use, no liability would accrue on the second use. A subsequent retail sale of the aircraft, however, would be taxable.

    The options mentioned above are beyond the scope of this outline, but generally allow a dealer to elect to pay sales tax on the charter fee without having to pay sales tax on the cost of the aircraft. Under the election, the dealer for each use must include all lease receipts and all charges made for transportation for sales tax purposes whether or not the dealer must also collect tax on such charges from his customer.


  6. Purchase of Aircraft by Charter Service.
    1. Taxable Purchase. A charter service is generally viewed as purchasing aircraft for use in the business of providing transportation services and is thus considered the consumer of the aircraft. Accordingly, charter services typically pay sales tax upon the purchase of aircraft.


    2. Definition of Charter Service. Reg. § 560-12-2-.04(1)(b) defines "aircraft service operations" as someone "engaged in the business of using aircraft solely in providing services for their customers." Examples of aircraft service operations cited in the regulations are (1) businesses which provide crop dusting services or (2) businesses which provide transportation services (charter services) for hire. Purchases of aircraft by persons engaged in aircraft service operations are generally taxable at the time of purchase. The Sales and Use Tax Regulations address the distinction between dealers and charter services as follows:
      The term "charter" is frequently used in the industry but is of little aid in determining the taxable nature of "charter" operations. The term is used to cover both transactions involving a lease or rental of the entire aircraft and transactions involving the furnishing of transportation services. However, leases and service transactions are not identically treated under the Act. For purposes of ascertaining tax liability, a "charter" transaction where the aircraft operator is employed and paid directly by the aircraft owner will be presumed to be a transportation service transaction unless the terms of the agreement or the surrounding circumstances indicate a lease. A "charter" transaction where the aircraft operator is employed and paid by the customer of the aircraft owner will be considered a lease transaction, unless the terms of the agreement or the surrounding circumstances indicate a service transaction. Reg. § 560-12-2-.04(1)(d).

      3. Thus, in determining whether a transaction is a lease, which gives rise to dealer status, or a service transaction, which results in sales tax upon the purchase of the airplane, the Regulations focus largely on whether the aircraft owner provides the pilot.

  7. Planning Opportunities for Businesses Interested in Using Aircraft in Georgia.
    1. Purchase in a Casual Sale. The Sales and Use Tax Regulations provide that no sales or use tax liability will be enforced against either the seller or the purchaser in a casual sale. Reg. Sec. 560-12-1-.07. A casual sale is defined as a sale in which the tangible personal property involved was not acquired or held by the seller for use in the operation of his business or for resale. Thus, the direct purchase of an aircraft from an individual who used the airplane for personal purposes should not be subject to sales tax. The regulations provide, however, that if the tangible personal property is sold through an agent, broker or other person who is regularly engaged in making sales of tangible personal property, either as a principal or an agent, then such sale will not be deemed as a casual sale transaction. Thus, in order to avoid sales tax under the casual sale exemption, the purchase must be made directly from a seller who has used the aircraft for personal purposes.


    2. Lease of Aircraft. The purchase of an aircraft by a Georgia taxpayer for business use generally results in immediate sales tax liability on the full purchase price of the aircraft. It may be possible to defer the tax, however, through acquisition of the airplane by lease rather than purchase. In view of the often rapid turnover of airplanes, the acquisition of airplanes through leasing can often save substantial amounts in sales tax liability. This may be true despite the payment of sales tax on the interest component of the lease payments.


    3. Purchase of Aircraft by Controlled Leasing Company. As discussed above, entities which lease airplanes are classified as dealers and may purchase tax-free under a certificate of exemption. The determination of whether a leasing company is a dealer largely turns on whether the customer or the leasing company supplies the pilot. Businesses which purchase expensive aircraft may want to explore the possibility of establishing a leasing company to purchase the aircraft. A separate corporation, either a subsidiary or a brother/sister corporation, would purchase the aircraft under a dealer’s certificate of exemption and would in turn lease the aircraft to the business and possibly to third parties. The parent business would employ the pilots, to support characterization of the transaction as a lease rather than a service transaction. Under the regulations, the leasing company would collect sales tax from the parent business as lease payments are made. Thus, the sales tax would be deferred over the term of the lease, and the leasing company should be able to purchase tax-free aircraft accessories, tires, repair parts, fuels and lubricants under applicable regulations.

      This tax planning opportunity requires careful review by the tax practitioner in order to determine such issues as whether the leasing company is a bona fide leasing company. This would generally be supported by fair market rental payments and possible leases to third parties. Additionally, the tax practitioner should review whether the leasing company could be required to collect sales tax for other tax jurisdictions.

C. Software.

  1. O.C.G.A. § 48-1-8. In the past, there has been considerable controversy in Georgia as to whether computer software constitutes tangible or intangible property. Hopefully, the enactment of O.C.G.A. § 48-1-8 will minimize controversy in this area. Although intended to clarify issues surrounding the ad valorem taxation of software (which states that computer software is personal property only to the extent of the value of the unmounted or uninstalled storage medium on or in which it is stored or transmitted), O.C.G.A. § 48-1-8(c) implies that sales tax liability is limited to the "copies of computer software held as inventory in a tangible medium ready for sale at retail by one who is a dealer with respect to such property."


  2. Position of Department of Revenue. The Georgia Department of Revenue generally takes the position with respect to the imposition of sales tax on software transactions that canned or prewritten software is taxable as a sale of tangible personal property. Prewritten software that is modified for a customer’s needs is taxable. A program written for a specific customer to his needs would be a personal service transaction and not subject to the tax.

    This fairly restrictive position is arguably inconsistent. O.C.G.A. § 48-1-8. This section would suggest that only shrink-wrapped inventioned software is taxable. For an update on the Department’s position regarding the applicability of Georgia sales and use tax to the retail sale of software, hardware, and associated software services, see Exhibit A (Letter from the Georgia Department of Revenue, Sales and Use Tax Division, February 2, 1999) attached hereto.


  3. Legal Basis for Department’s Position.
    1. Tangible v. Intangible Property. The historical and underlying premise of Georgia sales tax, as in most states, is based upon the taxation of tangible personal property upon transfer of title, possession or other right related thereto from one person to another. O.C.G.A. § 48-8-2(11) defines "tangible personal property" as follows:
      (11) "Tangible personal property" means personal property which may be seen, weighed, measured, felt, or touched or is in any other manner perceptible to the senses. "Tangible personal property" does not mean stocks, bonds, notes, insurance, or other obligations or securities.

      The statutory definition incorporates a common law concept of "tangible" as perceptible to the senses. Tangible generally does not include contractual rights and property rights even though such rights are evidenced by documentation which is tangible. This is consistent with the traditional common law concepts of tangible property in that the rights actually possessed are not the documentation, but the "intangible" contractual rights and property rights.

      Historically, the distinction between tangible and intangible has been relatively easy to apply. Advances in technology, however, have done much to blur the line between tangible and intangible property. Computer software ranks as one such technology which defies easy classification. One problem is that the industry itself does not clearly define the term software, and information contained in "software" can be transmitted through several media. For example, the information can be transmitted into a computer through cards, discs, digital transmission through telephone lines or through direct input by an individual.

      The law in this area became clouded early on, as taxpayers sought to characterize software as tangible personal property in order to claim an investment tax credit for federal income tax purposes. However, the Internal Revenue Service (the "Service") took the position that software is intangible property which cannot be the subject of an investment tax credit. Rev. Proc. 69-21, 1969-2 C.B. 303. Additionally, courts considering the issues for federal income tax purposes generally agreed with the Service, finding that the purchaser’s main objective was to acquire knowledge or a process rather than software diskettes or other tangible media on which the knowledge or process is sometimes carried. The courts noted that purchasers were often prohibited from copying or transferring a program and that once it was placed in the computer, the tangible medium could be destroyed or had to be returned to the seller. Further, the courts weighed the relative value of the information conveyed and the tangible medium which conveyed it.

      While the Service was arguing during this period that computer software was intangible property and thus not eligible for an investment tax credit, state revenue departments began to argue that software was tangible personal property subject to sales tax. In the early years, taxpayers contesting sales tax liability utilized federal precedent to argue successfully that software was not subject to sales tax because the intangible information, not the tangible media, is what actually was being sold. However, as the technology developed and software was more frequently sold to the general public in shrink wrapped packages, courts began to view software in a manner more analogous to books, records, and films.

      For example, in Citizens & Southern v. South Carolina Tax Commissioner, 311 S.E.2d 717 (S.C. 1984), the Court found that where software is sold on tangible media, such as software diskettes, the entire cost of the software is subject to sales tax. It should be noted that the statutory definition of tangible personal property in South Carolina is identical in all relevant respects to Georgia’s definition. The courts found the software under consideration was comparable to, rather than distinguishable from, books and movies, in which the information and the media are inseparable. The taxpayer attempted to distinguish software from photographs, books and movies, in that software can be transmitted electronically without the use of tangible media, such as software diskettes. The court was unsympathetic in its response that despite the availability of electronic transfer without use of tangible media, taxpayers must report sales tax in accordance with the form of their transaction.

      Georgia courts have not addressed the issue as to whether computer software represents tangible or intangible property. In perhaps the most analogous decision, Turner Communications Corporation v. Chilivis, 239 Ga. 91, 236 S.E.2d 251 (1977), in which videotapes were held to be tangible property, the Court noted that there were actually three (3) types of property involved: the magnetic tape itself, the program which had been encoded on the tape and the limited copyright license to use the encoded program on the tape. The Court largely disregarded the relative insignificant value of the tape as opposed to its contents and license to use the program, and held that the controlling factor was that the videotape could be seen and was perceptible to the senses. The Court therefore found the videotapes to be squarely within the statutory definition of tangible personal property.

      Precedent in other jurisdictions and the holding in Turner Communications can be read to support the Department’s position on software, that canned or prewritten software is taxable as a sale of tangible personal property. However, the Department’s position garbles the tangible media of software diskettes and the information on the diskettes which the industry views as the actual software. For example, the Department would clearly take the position that a shrink wrapped package would be taxable in the same manner as a record or book. However, if the software (which is the information used by the computer) was transferred via telephone lines, it is not clear whether such a transaction would be subject to sales tax in Georgia, although the Department’s apparent position is to the contrary. In light of the Court’s dicta in Citizens & Southern v. South Carolina Tax Commission, it appears that the later transaction may avoid sales tax.


    2. Exemption as Personal Services. As will be discussed in more detail later in this outline, Georgia exempts professional and personal service transactions from sales tax. Specifically, the applicable provision of the statute provides that taxable "sales at retail" do not include "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made." O.C.G.A. § 48-8-3(22). In the context of software, the Commissioner acknowledges that the writing of software for a specific customer is a service transaction, not subject to sales tax. Note, however, that the Department takes the position that customized software which was exempt when written for the original user becomes taxable when sold or transferred to another legal entity. Letter from Sales and Use Tax Division, April 18, 1991.


    3. The Modification of Prewritten Software. The position taken by the Department of Revenue suggests that prewritten software that is modified, regardless of the extent of modification, would be subject to sales tax. It would seem logical, however, that if the value of the prewritten software is small as compared to the modifications required by the customer, that the transaction would not be subject to sales tax under the personal service exemption. As discussed above, O.C.G.A. § 48-8-3(22) specifically contemplates exemption for services which involve sales as inconsequential elements for which no separate charges are made. Thus, if the value of the prewritten software is inconsequential as compared to the modifications, it appears the transaction should be exempt from sales tax. The position of the Department of Revenue also appears unclear from the standpoint of the software developer who uses certain prewritten components. It would appear unlikely that such "prewritten components" would cause a software program written for a specific customer to be taxable.

  4. Tax Planning.

    1. Determine Whether the Purchaser is Exempt. In all cases an initial determination should be made as to whether the purchaser is exempt from sales tax. For example, sales to certain non-profit organizations, governmental institutions and schools are exempt from sales tax, as discussed later in this outline. The laws in each state differ in this area and thus the laws must be specifically reviewed for each state.


    2. Distinguishing Canned Software and Software Written for a Specific Customer. Some general guidelines may assist in determining whether software fits within the personal service exemption. First, consultants who write software for a specific customer clearly provide personal services which are not subject to the tax. In such cases, the purchaser often acquires title to the copyright for the specific application written by the consultant. A closer case arises if a consultant retains the copyright to the software. In this case, the services for the first customer may be exempt as a personal service transaction, but licensing of the software to a second customer, with slight modifications on the original software, may be subject to sales tax. From a practical standpoint, the Georgia Department of Revenue may distinguish between large and small software systems. The licensing of a One Thousand and No/100 Dollars ($1,000.00) software package to several users, with slight modifications for each user, will likely be treated by the Department of Revenue as a taxable transaction. However, the licensing of a One Hundred Thousand and No/100 Dollars ($100,000.00) software system, which involves significant modification for each customer, might escape sales tax.

      On the other hand, the Department’s position would include the licensing of a One Hundred Thousand and No/100 Dollars ($100,000.00) system which has been customized, even substantially, for a particular customer. This is particularly relevant in the communications industry, in which the licensing of a One Million and No/100 Dollars ($1,000,000.00) system is not uncommon and the licensor may retain the right to license similar systems to other customers. For example, states have audited regional Bell Companies in order to determine whether large communication software packages are subject to sales tax.


    3. Transmission of Software Electronically. With some customers, it may be possible to transmit the software electronically without the use of tangible media. The Department of Revenue does not address the issue of whether electronic transmission is exempt from sales tax as not involving "tangible personal property" and case law in other jurisdictions suggests that sales tax would not apply because of the absence of tangible media. Citizens & Southern v. South Carolina Tax Commissioner, supra.


    4. Allocation of Cost Between Software and Consulting Services. The sale of business software packages, such as accounting packages and inventory packages, often involve standardized prewritten software which is transferred to the customer by diskettes. Business applications also generally involve substantial consulting services which may be exempt from sales tax. In fact, it is not uncommon that the cost of the standardized accounting or inventory software is less than the overall services provided to the customer. In these circumstances, it is important to allocate the costs of the software and the consulting services. Although the software may be subject to sales tax, the consulting services will generally be exempt. Of course, the Department of Revenue may attempt to reallocate costs if it appears there is an unreasonable allocation to services.

D. TAXATION OF ELECTRONIC COMMERCE

  1. Introduction

    With the advent of new technologies and the increased use of the Internet, electronic commerce has grown exponentially in recent years. With this increase of electronic commerce has also come the realization that such commerce represents a huge source of potential revenue for state, federal, and foreign governments. Some states, such as Connecticut, Florida, New Jersey, South Carolina, the District of Columbia, Ohio, and Texas, have already begun to tax electronic commerce.

    Because of the nature of electronic commerce, special problems have arisen with respect to (1) nexus issues, particularly in the sales tax area, and (2) the situs of income, generally an income tax issue. For sales tax analysis purposes, "nexus" is the threshold test that must be met before a state may tax income or transactions. To establish nexus for sales and use tax purposes, current case law requires some sort of physical presence. Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992). Because of the nature of electronic commerce, the notion of "physical presence" presents difficulties in determining nexus, and subsequently, determining which taxing authority has the right to tax such transactions.


  2. Internet Tax Freedom Act

    Realizing the need to develop a uniform policy for taxation of electronic commerce, Congress began work on the Internet Tax Freedom Act in March of 1997. On October 21, 1998, the Omnibus Appropriations Act of 1998, which includes the Internet Tax Freedom Act, was signed into law. The Act (1) bars, for a period of three years, all state, local, and federal taxes on Internet access and multiple or discriminatory taxes on electronic commerce, except those taxes that were imposed and actually enforced prior to October 1, 1998, (2) establishes a 19-member committee to conduct a study of Internet, intrastate, interstate, and international transactions, and to submit findings and legislative recommendations within 18 months, and (3) authorizes the U.S. to work toward establishing the Internet as a duty-free trading zone. While this does put a break on the enactment of a separate tax on internet access providers, it does not prevent the imposition of non-discriminatory, telecommunications based charges, i.e. sales tax on phone line access, nor does it address traditional nexus analysis as applied to internet-based commerce.

    Recently, the Commission authorized by the legislation has ended its work in substantial disagreement and disarray. The prognosis for further legislation has become extremely cloudy.

E. Manufacturing Exemptions

  1. General Exemptions. The Georgia Revenue Code provides several sales tax exemptions which are directed primarily at manufacturers. Some of these exemptions apply to the items of tangible personal property sold by the manufacturer (e.g., see O.C.G.A. § 48-8-3(31) -- sale of property manufactured or assembled in Georgia for export when delivery is taken outside Georgia; or O.C.G.A. § 48-8-3(32) -- sale of aircraft, watercraft and other transportation equipment manufactured or assembled in Georgia for use exclusively outside Georgia and when possession of the property is taken by the purchaser in Georgia for the sole purpose of removing the property from Georgia under its own power when the equipment does not lend itself reasonably to removal by other means; or O.C.G.A. § 48-8-3(45) -- sale, use, storage or consumption of paper stock which is manufactured in Georgia into catalogs intended to be delivered outside Georgia for use outside Georgia). Other exemptions focus on items of tangible personal property purchased by the manufacturer and used in its manufacturing operations. It is this latter category that has created the most confusion and litigation and, therefore, will be addressed in more detail below.


  2. Machinery Exemptions.
    1. Replacement or Upgrade Machinery.
      1. Pre-July 1, 1994. For replacement machinery purchased prior to July 1, 1994, O.C.G.A. § 48-8-3(34)(A) allowed the manufacturer to obtain a refund of sales tax related to the purchase of replacement machinery used directly in the manufacture of tangible personal property, but only if the normal productive capacity of the replacement machinery exceeded the normal productive capacity of the machinery replaced. Reg. § 560-12-2-.63(5) required that the purchaser maintain sufficient records to substantiate this increase in the normal productive capacity of the replacement machinery over the machinery replaced.


      2. Pre-July 1, 1997. As of July 1, 1994, O.C.G.A. § 48-8-3(34)(A) exempts from sales tax the purchase of replacement machinery used directly in the manufacture of tangible personal property. The requirement that the manufacturer demonstrate that an increase in productive capacity related to the replacement machinery has been eliminated.


      3. Law Prior to July 1, 2000. As of July 1, 1997, O.C.G.A. § 48-8-3(34)(A) exempts from sales tax, the purchase of replacement machinery, including components thereof, which are used directly to manufacture tangible personal property when the machinery is bought to replace or upgrade machinery in a manufacturing plant located in Georgia.


      4. 2000 Legislation. Amendments to 48-8-3(34)(A) contained in H.B. 1510 clarify that only upgrade components are exempt. The phrase "including components thereof," which had been added in 1997, was deleted.

    2. Replacement Parts, Machinery, Clothing, Molds or Replacement Molds, Dies or Replacement Dies. O.C.G.A. 48-8-3 (34.3) creates a new phased in exemption for replacement parts, machinery clothing, molds or replacement molds, dies or replacement dies, and tooling or replacement tooling for machinery used directly in the manufacturing of tangible personal property to apply to the portion of the sales price for each eligible item up to $150,000. The graduated exemption will apply to purchases made on or after January 1, 2001 using the following percentages: 20% of sales prices for transactions beginning in 2001, 40% in 2002, 60% in 2003, 80% in 2004 and 100% in 2005 and thereafter.


    3. Manufacturing Machinery Incorporated Into New Plants in Georgia. O.C.G.A. § 48-8-3(34)(B) provides an exemption for the purchase of machinery which is used directly in the manufacture of tangible personal property when the machinery is incorporated for the first time into a new manufacturing plant located in Georgia. Under Reg. § 560-12-2-.62(5), the Department states that it will consider an addition to an existing plant site, or the addition of a new department to an existing manufacturing plant, as merely a plant expansion and such addition will not be deemed to constitute a new plant within the sense of the Act.


    4. Purchase of Additional Machinery Incorporated for the First Time Into a Manufacturing Plant.
      1. Pre-July 1, 1994. For additional machinery purchased prior to July 1, 1994, O.C.G.A. § 48-8-3(34)(C) exempted the purchase of machinery used directly in the manufacture of tangible personal property when (1) the machinery was incorporated as additional machinery for the first time in a manufacturing plant that existed in this state and (2) the acquisition of the machinery resulted in a substantial increase in the productive capacity of the plant. Reg. § 560-12-2-.62(6) provided that machinery would qualify for the exemption if the acquisition resulted in a minimum increase in the productive capacity of the plant of fifteen percent (15%).
      2. Current Law. As of July 1, 1994, O.C.G.A. § 48-8-3(34)(C) exempts "machinery which is used directly in the manufacture of tangible personal property when the machinery is incorporated as additional machinery for the first time to a manufacturing plant located in this State." The requirement that the machinery must result in a minimum increase of fifteen percent (15%) in productive capacity of the plant has been eliminated.


    5. Exemption for Primary Material-Handling Equipment. The Georgia Code provides an exemption for sales of primary material-handling equipment which is used directly for the handling and movement of tangible personal property and racking systems used for the conveyance and storage of tangible personal property in a warehouse or distribution facility located in Georgia when the equipment is either a part of: (a) an expansion worth Five Million and No/100 Dollars ($5,000,000.00) or more of an existing warehouse or distribution facility or (b) the construction of a new warehouse or distribution facility when the total value of all property purchased or acquired for use in the new warehouse or distribution facility is worth Five Million and No/100 Dollars ($5,000,000.00) or more (real and personal property combined). O.C.G.A. § 48-8-3(34.1). Lastly, to qualify this exemption, the purchaser must obtain a Certificate of Exemption (Form ST-WD1) which must include a schedule of equipment to be purchased or leased, a full description of the usage of the equipment and the cost of each piece of equipment.


    6. Exemption Concerning Electricity Used in Manufacturing. Additionally, the Georgia Code allows an exemption from sales tax for electricity used directly in the manufacture of a product if the cost of the electricity exceeds fifty percent (50%) of the cost of all materials used in the product. O.C.G.A. § 48-8-2(6)(B)(ii). This exemption was phased in gradually. For manufacturers located in Georgia on or before January 1, 1995, for calendar years beginning in 1995, twenty percent (20%) of the direct cost of the electricity was exempt. This percentage increased to forty percent (40%) in 1996, sixty percent (60%) in 1997, eighty percent (80%) in 1998 and since 1998, one hundred percent (100%) of the direct cost of the electricity is exempt.

  3. Key Terms and Issues Relating to Machinery Exemptions.
    1. Machinery. There are several cases in Georgia which have had to interpret the three (3) machinery exemptions contained in O.C.G.A. § 48-8-3(34). Under the case law, in order to qualify for the exemptions, the property being purchased must have a character of machinery at the time of sale, the machinery must be used in the manufacture of tangible personal property for sale and the machinery must be used directly in the manufacturing process. In the past, the Revenue Department has taken the position that in order for an item of tangible personal property to qualify as "machinery," it must be a "machine." However, the courts have given the term "machinery" a fairly expansive meaning. As held in Amoena Corporation v. Strickland, 248 Ga. 496, 283 S.E.2d 894 (1981), the exemption is not limited strictly to parts which generate or distribute power, but extends to components such as molds. The Court in Strickland held that a more restrictive interpretation would contravene the purpose intended by the legislature in enacting the exemption.


    2. Manufacture of Tangible Personal Property. As stated in Reg. § 560-12-2-.62(4), the manufacture of tangible personal property consists of an operation or a series of separate operations at a fixed location whereby, through the application of machines and labor to raw material or materials at any stage of becoming finished tangible property, the form or composition of the material or materials is significantly changed. Manufacture includes the assembly of finished units of tangible personal property into a unit or units of tangible personal property; packaging when it is part of a continuous manufacturing operation and the package or container becomes a part of the tangible personal property as such unit is customarily offered for sale; and delivery of raw materials and work in process or finished units directly from one manufacturing operation to another in the same plant facility. However, manufacture generally does not include storage, delivery to or from the plant or delivery to or from storage within the plant.

      The Georgia cases have generally interpreted the concept manufacture of tangible personal property broadly. For example, in Georgia Marble Company v. Strickland, 243 Ga. 206, 253 S.E.2d 155 (1979), machinery used to crush marble rock to produce limestone was held as qualifying for the exemption.


    3. Used Directly in the Manufacturing Process. Both the statute and the regulations require that the machinery be used "directly" in the manufacturing process. In Blackmon v. Screven County Industrial Development Authority, 131 Ga. App. 265, 205 S.E.2d 497 (1974), the Court held that a climate control system used in the manufacture of synthetic yarns was not machinery used directly in the manufacturing process. The Court reached this holding even though it was conceded that the climate control system was essential to the manufacturing process. Similarly, in Southwire v. Chilivis, 139 Ga. App. 329, 228 S.E.2d 295 (1976), the Court held that the taxpayer’s electrical equipment was not directly involved in the manufacture of copper wire. Rather, the Court stated that the electricity transformed and transferred by the equipment which results in the production of copper wire. However, both of these cases were decided before the 1981 Amoena decision which appears to have adopted a broader "integrated plant" concept.

  4. Exemptions for Industrial Materials. O.C.G.A. § 48-8-3(35) provides the following exemption for industrial materials used by manufacturers:

    (35) (A) The sale, use, storage, or consumption of:
    (i) Industrial materials for future processing, manufacture, or conversion into articles of tangible personal property for resale when the industrial materials become a component part of the finished product;
    (ii) Industrial materials other than machinery and machinery repair parts that are coated upon or impregnated into the product at any stage of its processing, manufacture or conversion; or
    (iii) Materials, containers, labels, sacks, or bags used for packaging tangible personal property for shipment or sale. To qualify for the packaging exemption, the items shall be used solely for packaging and shall not be purchased for reuse;
    (B) As used in this paragraph, the term "industrial materials" does not include natural or artificial gas, oil, gasoline, electricity, solid fuel, ice or other materials used for heat, light, power or refrigeration in any phase of the manufacturing, processing or converting process.

    Note that under O.C.G.A. § 48-8-3(35)(ii), the exemption applies to all items "coated upon or impregnated into the product at any stage of its processing, manufacture or conversion," even if the item is removed at a subsequent stage in the manufacturing process. See Hawes v. Bibb Manufacturing Company, 224 Ga. 141, 160 S.E.2d 355 (1968) (dealing with spray oils which were initially sprayed on the textile fibers, but washed out later). In Chilivis v. Stein, 141 Ga. App. 536, 233 S.E.2d 881 (1977), the Court held that lithographic plates used by a printer did not qualify for this exemption since the plates do not become component parts of the finished product, nor are they impregnated into the product.


  5. Pollution Control and Air Quality Exemptions.
    1. Machinery and Equipment Used to Reduce or Eliminate Air or Water Pollution. O.C.G.A. § 48-8-3(36)(A) provides an exemption from sales tax for the sale of machinery and equipment which is incorporated into any facility and used for the primary purpose of reducing or eliminating air or water pollution.
        Reg. § 560-12-2-.87(3) provides that the property must have the character of machinery at the time of purchase. Note that the statute states that machinery and equipment can qualify for the exemption. In the 1973 Op. Att. Gen. No. U73-18, it was held that soda ash used in reducing water pollution was not subject to the exemption as it was neither "machinery" nor "equipment." In addition, the regulations and statute specifically require that the machinery and equipment be incorporated into a facility. Finally, Reg. § 560-12-2-.87(3) provides that the exemption is not applicable to materials to be incorporated into real property.
      1. Unless the purchaser presents to the seller a certificate applied for by the purchaser and issued by the commissioner, the seller must collect sales tax. If the purchaser does not present the certificate, the purchaser may seek a refund of the tax if filed within three (3) years following the date of payment to the retailer.
      2. The exemption is available only to the ultimate owner of the equipment. The exemption is not available to contractors who purchase pollution control equipment and install the equipment into manufacturing facilities which they are building. Indian River Construction Company v. Beloit Passavant Corp., 241 Ga. 282, 244 S.E.2d 814 (1978). Rather, the contractor is presumed to pass the tax cost on to the ultimate owner of the facility, who is entitled to apply for a refund of the tax paid by the contractor. EIMCO BSP Services Company, 241 Ga. 263, 244 S.E.2d 829 (1978).

    2. Machinery and Equipment Used in Recycling Waste Products. O.C.G.A. § 48-8-3(37) exempts the sale of machinery and equipment for use in combating air and water pollution and any industrial material bought for further processing in the manufacture of tangible personal property for sale or any part of the industrial material or by-product thereof which becomes a wasteful product contributing to pollution problems and which is used up in a recycling or burning process. Subparagraph (37) has been held to apply only to machinery and equipment actually used in recycling the waste product industrial materials referred to in the second part of the exemption. EIMCO BSP Services Company v. Chilivis, supra. Thus, the courts have limited subparagraph (37) to recycling machinery and equipment.
    3. Machinery and Equipment Incorporated into any Tele-communications Manufacturing Facility. Newly enacted O.C.G.A. 48-8-3(69) exempts the sale of machinery, equipment and materials incorporated into and used in the construction or operation of a clean room of Class 100 or less, not to include the building or any permanent, non-removable component of the building that houses such elan room, provided that such clean room is used directly in the manufacture of tangible personal property.

  6. Procedure for Obtaining the Pollution Control Exemptions.
    1. General Rule. The statute and regulations generally require that even though the exemption may apply, the seller must nevertheless collect sales tax. The purchaser is then entitled to seek a refund upon proper proof that the machinery or equipment is subject to the exemption.
    2. Advanced Determination Procedure. In the context of the purchase of machinery in a new plant or additional machinery for an existing plant, or a purchase of machinery and equipment to combat air or water pollution, a purchaser may, prior to purchase, submit an application for certificate of exemption (Forms ST-M1 or ST-M7) to the Commissioner. If approved, the Commissioner will issue a Certificate of Exemption (Form ST-M2 or ST-M8), which can be presented to the seller certifying that the purchaser is entitled to purchase the machinery or equipment without paying tax. The Commissioner has the authority to require a bond as security in the event it is determined that the machinery is not, in fact, subject to the exemption. This advance ruling procedure is not available with respect to replacement machinery.
    3. Machinery and Equipment Incorporated into any Tele-communications Manufacturing Facility. Enacted in 1997, O.C.G.A. § 48-8-3(60) exempts the sale of machinery and equipment which is incorporated into a telecommunications manufacturing facility if: (a) the machinery or equipment is primarily used to improve the air quality in certain advanced technology cleanrooms and (b) the cleanrooms are used directly in the manufacture of tangible personal property.

F. Leasing and Financing.

  1. Leasing. Georgia law imposes a tax on the gross lease or rental charge for tangible personal property. The person to whom the tangible personal property is leased or rented is liable for the tax and must pay the tax to the person who leases or rents the property. The Georgia Code defines "lease or rental" to mean "the leasing or renting of tangible personal property and the possession or use of the property by the lessee or renter for a consideration without transfer of title to the property." O.C.G.A. § 48-8-2(5). The general statutory authority for the imposition of tax on lease payments provides that:
    Every person to whom tangible personal property in the state is leased or rented shall be liable for a tax on the lease or rental at the rate of 4% of the gross lease or rental charge. The tax shall be paid to the person who leases or rents the property by the person to whom the property is leased or rented. A person who leases or rents property to others as a dealer under this article shall remit the tax to the Commissioner as provided in this article. When received by the Commissioner, the tax shall be a credit against the tax imposed on the person who leases or rents the property to others. Every person who leases or rents tangible personal property in this state to others shall be a dealer and shall be liable for a tax on the lease or rental at the rate of 4% of the gross lease or rental proceeds, or the amount of taxes collected by him from persons to whom he leases or rents tangible personal property, whichever is greater.
    O.C.G.A. § 48-8-30(d)(1).


    In the event the lease to the person to whom the property is leased or rented is not taxable, because of an exemption or otherwise, the lease or rental is not taxable to the lessee. O.C.G.A. § 48-8-30(d)(2).

    Generally, the tax is collected by the lessor as the lessee makes lease payments to the lessor. However, in the situation of lease agreements with a term of a period of ten (10) years or more, the lessee has the option to discharge the sales tax in full for all lease payments by paying sales tax computed on the fair market value of the tangible personal property on the date of inception of the lease agreement in the same manner and under the same conditions applicable to sales of tangible personal property. O.C.G.A. § 48-8-30(d)(3).

    In the case of tangible personal property leased or rented outside of Georgia, upon the first instance of use in Georgia, the person to whom the property is leased or rented becomes a dealer and is liable for a tax at the rate of four percent (4%) of the rental charge paid to the lessor, subject to credit authorized for like taxes previously paid in another state. O.C.G.A. § 48-8-30(e).

    In many lease arrangements, a portion of the lease payments made by the lessee to the lessor may represent "true" lease payments while a portion of the payments may represent charges for repairs and services. It is often possible to treat the payments for repairs as being exempt from sales tax. In order to achieve this result, the parties must segregate the amounts paid for leasing the tangible personal property and the amounts paid for repair of the tangible personal property. Furthermore, if the amounts paid for repair and service of the intangible personal property do not vary over time or are not related to the actual repair services, the Commissioner may recharacterize amounts denominated as payment for repair and services as rental payments subject to tax. In W.E. Strickland v. Sperry Rand Corporation, 248 Ga. 535, 285 S.E.2d 1 (1981), the Court held that separately stated maintenance charges which are based upon maintenance cost and which may be changed after the initial year independently of the rental or lease charge, qualify as exempt charges for repairs and services.

    With respect to taxability of lease payments, it is the position of the Georgia Revenue Department that leases and rentals are taxable in Georgia if either the delivery of the leased or rented property takes place in Georgia or if the lease contract is consummated in the state, regardless of the location of the personal property covered by the lease. Furthermore, O.C.G.A. § 48-8-30(e) provides that upon the first instance of use within this state of tangible personal property leased or rented outside this state, the person to whom the property is leased or rented is a dealer and is liable for tax at the rate of four percent (4%) of the rental charge paid to the person who leased or rented the property, subject to the credit authorized for like taxes previously paid in another state. L.M. Berry and Company v. Blackmon, 231 Ga. 659, 203 S.E.2d 520 (1974), 1969 Op. Att. Gen. No. 69-146.


  2. Financing. The tax on lease payments applies generally to all leases of tangible personal property and will generally apply in the context of a sales-lease back transaction. For example, a taxpayer may own equipment which it purchased for business use and on which it paid sales tax. In a later unrelated transaction, the taxpayer may for financing reasons sell the property and lease the property back from the purchaser. In such a case, the sale to the purchaser would generally be tax-free under a dealer exemption. However, the lease payments made by the original owner to the lessor would generally be subject to sales tax. Thus, the original owner would pay sales tax twice, first upon the original purchase of the property and second upon making the lease payments to the lessor who purchased the property in a sale-lease back arrangement.

    Sale-lease back arrangements are often employed in the context of financing transactions. In the traditional financing transaction, the lender loans a specific sum and takes a security interest in property. In a sale-lease back arrangement, the lender advances money under the "sale" and takes a "security interest" under the lease agreement and is repaid under the lease agreement. The Georgia Revenue Department has in the past taken the position that sales tax is owed on the lease agreement regardless of the fact that the arrangement is in fact a financing arrangement.

    In Footpress Corporation v. Strickland, 242 Ga. 686, 251 S.E.2d 278 (1978), the Court held that a sale-lease back arrangement was neither a sale nor a lease, but a security arrangement for a loan. Thus, the Court held that regardless of the form of the transaction, taxation of the repayment of the secured loans was not within the intent of the legislature which taxed leases of tangible personal property. Footpress, supra, at 280. The Court held, to the advantage of the taxpayer, that "the substance of a transaction controls its tax treatment rather than the appellation chosen by the parties." Citing Transfer Company v. Hawes, 225 Ga. 436, 169 S.E.2d 290 (1969) and Hawes v. Jordan & Company, 85 Ga. 741, 11 S.E. 833 (1889), the Court rejected the Commissioner’s contention that the parties selected a lease as the form of their transaction and must now suffer the tax consequences.

    In structuring a sale-lease back transaction to qualify as a tax-free transaction under the holding in Footpress, the taxpayer must consider several factors. First, who, the lessor or lessee, is treated as owning the property for federal income tax purposes. Second, whether the lessee can purchase the equipment at the termination of the lease for nominal consideration. Third, whether the lease is treated under the Uniform Commercial Code as a security arrangement. If properly structured, financing accomplished under a sale-lease back transaction may be tax-free.

G. Contractors. [Revise this Section after the new contractor regulations are promulgated (expected in Fall, 2000)]

This discussion outlines the procedures and requirements which must be followed by contractors in order to comply with the provisions of the Georgia Sales and Use Tax Act. Contractors are subject to special procedures in Georgia designed to insure that the proper amount of sales and use taxes are paid on materials they consume in performing contracts for the improvement of real property. These special procedures have been adopted largely because of the transient nature of work performed by contractors, the lack of a permanent place of business of many contractors and the problems of collection of sales and use tax from contractors.

The special procedures apply only to contractors furnishing tangible personal property and performing contracts for the improvement of real property. "Contractors" are defined in Reg. § 560-12-2-.26 as "Any person who contracts to furnish tangible personal property and perform services thereunder in constructing, altering, repairing or improving real property in this State. . . ." A contractor falling within the above definition is deemed to be the consumer of all tangible personal property used or consumed in performing the contract. Thus, because the contractor is deemed to be the consumer, the contractor must pay the sales tax at the time of purchase, use, storage or consumption in Georgia of tangible personal property, whichever first occurs.

The statute applicable to contractors was revised in 2000. New regulations are expected later this year. Generally, special rules apply to the following types of contractors: (i) resident general contractors; (ii) resident subcontractors and (iii) non-resident contractors (both general and subcontractors). The general rules applicable to these categories are summarized as follows: (i) general contractors must register with the Department as contractors, file monthly returns on all taxable transactions and retain four percent (4%) of the amount of all qualifying subcontracts when the total amount of the contract for any given project is $250,000 or more; (ii) subcontractors must also register and may elect to avoid having two percent (2%) of the contract retained by the general contractor by posting a bond with the Revenue Department and (iii) non-resident contractors must comply with the rules applicable to resident contractors as well as additional requirements specific to non-resident contractors. This summary of the general procedures relating to the above three (3) categories of contractors is discussed in more detail below.

  1. Resident General Contractors. Reg. § 560-12-2-.26(1)(a) requires that a general contractor apply for a "certificate of registration" before beginning work on a contract. This is similar to the registration requirement which applies to any dealer in tangible personal property. The general contractor generally must submit monthly sales and use tax reports to the Department, but may qualify to file quarterly. The report must be filed during each reporting period regardless of whether the contractor purchased materials during that period and regardless of whether any sales or use tax liability was incurred. Generally, the sales tax reports are due twenty (20) days after the end of the reporting period in accordance with O.C.G.A. § 48-8-49.

    To assist further in the policing of sales and use tax collection, the regulations, which are currently being revised, require contractors to submit to the Commission a list of those subcontractors with whom they do business. Further, a general contractor must notify the Commissioner within ten (10) days of the execution of each agreement with a subcontractor. Reg. § 560-12-2-.26(3). A general or prime contractor who enters into a contract with the subcontractor where the total amount of the contract, or contracts between the contractor and subcontractor is greater than $250,000 shall withhold up to 4% of the payments due the subcontractor. O.C.G.A. 48-8-62(d)(1). A general contractor will be liable for any sales and use taxes owed by the subcontractor if the contractors fails to withhold two percent (2%) of the payments due the subcontractor. Within sixty (60) days of the completion of the contract by the subcontractor, the general contractor must notify the Revenue Department of the withholding amounts which are held in escrow. If a subcontractor fails to comply with the requirements to register and pay sales tax, the Department may demand payment from the general contractor of the two percent (2%) retainage. If the general contractor has failed to withhold the two percent (2%), the general contractor may be liable for any sales tax owed by the subcontractor on the contract. In the case of a corporate general contractor, this liability may extend to the officers of the corporation.


  2. Resident Subcontractors. The regulations applicable to resident subcontractors are also being revised. The former regulations provide that a resident subcontractor may apply for a release of the two percent (2%) retainage discussed above by certifying to the Commissioner what percentage of work has been completed and that all sales taxes have been paid on his report form. The Department, after satisfying itself of compliance, will send written notice (Form S. & U. T. 214-6) to the general contractor authorizing him to release the funds retained for that reporting period to the subcontractor. Reg. § 560-12-2-.26(7). A subcontractor may avoid having the two percent (2%) withheld by the general contractor by posting a surety bond under O.C.G.A. § 48-8-63(e). This election requires the subcontractor to make "application for a subcontractor’s sale and use tax bond" (Form S. & U. T. 214-2) on which the annual gross receipts of the subcontractor from the previous year are listed. This information must be amended annually since the amount of the bond is determined by the gross receipts of the subcontractor from the previous year. Reg. § 560-12-2-.26(9). Upon approval of the application, the subcontractor must furnish a bond on the Department’s form (Form S. & U. T. 214-3) which releases the general contractor from the requirement of withholding two percent (2%) of the contract price.

    The Revenue Department rules for determining the amount of the bond were amended in the 2000 legislative session. They allow a bond to be posted for as little as Five Thousand and No/100 Dollars ($5,000.00) or as much as Fifty Thousand and No/100 Dollars ($50,000.00) as determined by the commissioner. O.C.G.A. § 48-8-63(e). Upon approval of the bond, the subcontractor may then furnish the Sales Tax Division with a list of prime contractors to be notified. Once officially notified, the general contractors are relieved from the requirement of withholding two percent (2%) on that particular subcontractor. Reg. § 560-12-2-.26(10).


  3. Non-Resident Contractors and Subcontractors. In addition to the requirements for general contractors and subcontractors, an additional tier of requirements, also currently being revised, apply for non-resident general contractors and subcontractors. As set out in O.C.G.A. §§ 48-13-30 through 48-13-38, these rules also apply to taxes other than sales taxes and require the non-resident to keep separate records. A non-resident contractor must first file an "application for authorization to perform contracts" (Form S. & U. T. 348-1) for each contract amounting to Ten Thousand and No/100 Dollars ($10,000.00) or more and pay a fee of Ten and No/100 Dollars ($10.00) per contract. Before beginning under the contract, a valid non-resident contractor’s tax bond must be furnished equal to ten percent (10%) of the contract price. Reg. § 560-12-2-.43(2). This bond requirement is in addition to the bond required of domestic subcontractors. Thus, a non-resident subcontractor must post both bonds and is not given the option of having two percent (2%) retained in lieu of posting the "retainage" bond. This two percent (2%) retainage option is available only to Georgia subcontractors.

    After the non-resident contractor files his application, posts his bond and files a consent to service of process with the Secretary of State, the Revenue Department notifies the contractor by sending him a "qualification acknowledgment" (Form S. & U. T. 348-2) allowing the contractor to commence work under his contract. This "qualification acknowledgment," which must be posted at job site in case of inspection by an agent of the state, evidences the fact that the non-resident contractor has registered the contract and posted the required bond. Without it, the law permits a temporary injunction to be obtained without notice, to cease work under the contract.

    Upon completion of the contract, should the contractor desire to have the bond canceled, he is required to submit a statement to the Revenue Commissioner from the employment security agency certifying that the contractor has complied with the employment provisions of O.C.G.A. § 38-8-1, et seq. and to furnish an affidavit from the contractor stating that all taxes due the State of Georgia and its political subdivisions have been paid.

H. Charitable Institutions and Other Non-Profit Organizations.

  1. No General Exemption. O.C.G.A. § 48-8-3 sets forth numerous exemptions from the application of sales and use tax, but does not provide a general exemption for the purchase or lease of tangible personal property by charitable institutions and other non-profit organizations. The Attorney General in an Unofficial Opinion, 1971 U. Op. Att. Gen. No. U71-143, unequivocally has stated Georgia’s position in this area. The Opinion states "Non-profit organizations are not, because of their status as such, exempt from sales and use taxes." Although Georgia has no broad exemption for non-profit organizations, O.C.G.A. § 48-8-3 provides numerous specific exemptions for certain non-profit and charitable organizations.

    O.C.G.A. § 48-8-3 currently contains seventy-two (72) specific exemptions. Thus, the difficult issue is determining whether an exemption applies to a particular type of non-profit organization. The following is a list of various exemptions set forth in § 48-8-3:

    1. Sales to the United States, the State of Georgia or counties or municipalities of the State of Georgia or any bona fide department of such governments, § 48-8-3(1).
    2. Sales to hospital authorities created by Article 4 of Chapter 7 of Title 31, § 48-8-3(6).
    3. Sales to various non-profit nursing homes, licensed in-patient hospices and general or mental hospitals when such facilities are tax exempt organizations under the Internal Revenue Code, § 48-8-3(7).
    4. Sales to the University System of Georgia and its educational units, § 48-8-3(8).
    5. Sales to certain private colleges and universities, § 48-8-3(9).
    6. Sales to private elementary and secondary schools which have been approved by the Commissioner, § 48-8-3(10).
    7. Sales to foreign supported educational or cultural institutions which satisfy various requirements, including qualification as a Section 501(c)(3) organization and various other qualifications, § 48-8-3(11).
    8. Certain sales or uses by museums, § 48-8-3(14).
    9. Certain religious publications and certain sales by religious institutions in connection with fund raising activities, § 48-8-3(15).
    10. Certain sales by Rock Eagle 4-H Center, § 48-8-3(38).
    11. Sales to orphans’ homes located in Georgia and operated as non-profit corporations, § 48-8-3(41).
    12. Sales to blood banks operated as non-profit corporations, § 48-8-3(46).
    13. Sales by any parent teacher organization qualified as a Section 501(c)(3) organization, § 48-8-3(56).
    14. Sales of eligible food and beverages to and by member councils of both the Girl Scouts of the U.S.A. and the Boy Scouts of America in connection with fundraising activities of any such council, § 48-8-3(59).
    15. Sales to or by any nonprofit which has as its primary purpose the raising of funds for books, materials, and programs for public libraries, § 48—8-3(71).


    As noted above, many of the above exemptions require that the non-profit organizations qualify as a tax exempt organization under the Internal Revenue Code. Thus, any seller relying on one of the above exemptions should require the non-profit organization to give proof of its tax exempt status.

I. Health Care.

  1. Professional Services. Professional services rendered by Hospitals, physicians and other health care providers are exempt from sales and use taxation, assuming that any personal property furnished to the patient in connection with the service transaction is an incidental or inconsequential element of the transaction for which no separate charge is made. O.C.G.A. § 48-8-3(22).

    Except with respect to those certain tax-exempt authorities referenced below, physicians, surgeons and other health care practitioners are deemed users or consumers of all items of tangible personal property used by them and are required to pay the tax thereon at the time of purchase. For example, the Department treats ophthalmologists and optometrists as primarily engaged in the rendering of personal services. Reg. § 560-12-2-.67. Thus, contact lenses furnished by them to their patients are considered incidental to the professional services rendered. Accordingly, the professional is treated as the consumer of the contact lenses and required to pay tax on the lenses at the time of purchase. On the other hand, if the ophthalmologist or optometrist makes a separate charge for the lenses, it would need to register as a dealer with the Department and purchase such property tax exempt. Furthermore, the subsequent sale by prescription of the lenses to the patient also would be exempt from sales tax. Reg. § 560-12-2-.67.


  2. Hospital Authorities. Sales to tax exempt Hospital Authorities created under Chapter 7 of Title 31 of the Georgia Code, as well as non-profit tax exempt nursing homes, licensed in-patient hospices, general and mental hospitals are exempt from sales and use taxation. O.C.G.A. §§ 48-8-3(6) and (7); Undercofler v. Hospital Authority of Forsyth County, 104 Ga. App. 213, 121 S.E.2d 387 (1965); Reg. § 560-12-2-.50. Reg. § 560-12-2-.92(2)(a) outlines the procedure in which these organizations can obtain a Certificate of Exemption from the Revenue Commissioner. The foregoing exemption only relates to purchases by the nursing home, hospice or hospital. If the nursing home or hospital engages in selling tangible personal property, it must register as a dealer, collect, report and remit the tax. Reg. §§ 560-12-2-.50(3) and 560-12-2-.92(3)(b).


  3. Drugs, Medicine and Medical Equipment. Sales tax generally applies to all retail sales of drugs, medicine, medical supplies and equipment except for the following items specifically exempted by the Georgia Code:
    • Sales of drugs dispensed by prescription and prescription eye glasses and contact lenses. O.C.G.A. § 48-8-3(47).
    • Sales of blood measuring devises, other monitoring equipment, or insulin delivery systems used exclusively by diabetics and sales of insulin, insulin syringes, and blood glucose level measuring strips dispensed without a prescription. O.C.G.A. § 48-8-3(50).
    • Sales of oxygen prescribed by a licensed physician. O.C.G.A. § 48-8-3(51).
    • Sale or use of hearing aids. O.C.G.A. § 48-8-3(52).
    • Sales of certain durable medical equipment which are paid for directly through the Medicare or Medicaid programs. O.C.G.A. § 48-8-3(54).
    • Sales or use of any physician prescribed prosthetic devise. O.C.G.A. § 48-8-3(54.1)
    • Sales of wheelchairs and any accompanying equipment to or by permanently disabled persons. O.C.G.A. § 48-8-3(72).

J. Services v. Tangible Personal Property.

  1. Introduction. Although the traditional concept of sales tax relates to tangible personal property, O.C.G.A. § 48-8-2(6) defines "sale at retail" to include "services taxable under this article." Thus, under Georgia law, services which are not provided with a specific exemption may be subject to sales tax. The primary provisions of the Georgia law under which different types of services are exempt from sales tax can be characterized as follows:
    1. Exemptions for certain freight and delivery charges.
    2. Exclusion from the "sale" of tangible personal property amounts charged for labor or services rendered installing, applying, remodeling or repairing property sold.
    3. Professional, insurance or personal service transactions.
    4. Fees or charges for services rendered by repairmen for which a separate charge is made.

      The exemption of the above described services often depends on whether the charge for the service is separately stated. As discussed in further detail below, several other aspects of the transaction directly affects the taxability of the transaction. In reviewing the exemptions from sales tax discussed below, one should keep in mind that characterization of a transaction as an exempt service transaction does not mean that the State of Georgia has failed to collect sales tax. Rather, in many cases the service provider has paid sales tax as the consumer of the tools, equipment and materials necessary to produce the services. Further, in the context of professional services involving the sale of inconsequential property, the service provider has paid tax on the property transferred.

  2. Freight and Delivery Charges. O.C.G.A. § 48-8-3(18) exempts from the Georgia Sales and Use Tax, "Charges made for the transportation of tangible personal property including, but not limited to, charges for accessorial services such as refrigeration, switching, storage and demurrage made in connection with interstate and intrastate transportation of the property." In view of the exemption, it would seem that charges for transporting property would generally be charges for a service separable from the sale of property. However, the exemption set forth above applies solely to those charges made for transportation services by a carrier, not incident to a sale of goods by it and does not exempt costs the seller incurs that are part of the sale, even though such charges are separately stated. 1970 Op. Att. Gen. No. 70-94. Under the general rule, "sales price" on which sales tax is based includes freight and delivery charges charged by the seller, whether or not such charges are separately stated. O.C.G.A. § 48-8-2(9)(A) defines "sales price" as follows:
    The total amount valued in money, whether paid in money or otherwise, for which tangible personal property or services are sold including, but not limited to, any services that are a part of the sale and any amount for which credit is given to the purchaser by the seller without any deduction from the total amount for the cost of the property sold, the cost of materials used, labor or service costs, losses, or any other expenses of any kind.

    Similarly, use tax is imposed on the "cost price" which is defined under O.C.G.A. § 48-8-2(2) as "the actual cost of articles of tangible personal property without any deductions for the cost of materials used, labor costs, service costs, transportation charges, or any other expenses of any kind." In view of the encompassing language contained in both definitions, it appears that all expenses, including transportation expenses, would be included in determining how much a buyer pays the seller for purposes of computing tax in a retail sales transaction.

    The Court in Colonial Pipe Line Company v. Undercofler, 115 Ga. App. 58, 153 S.E.2d 592 (1967) in the context of imposition of use tax on property delivered to a Georgia taxpayer by an out-of-state seller, held that separately stated transportation charges were included in the cost of the property for use tax purposes. The Court added in dicta, however, that if the purchaser contracted with the understanding that a specific amount of the net price was an additional charge to defray the expense of delivery, charges for delivery could be deducted in order to arrive at the "cost price." In Richs, Inc. v. Blackmon, 133 Ga. App. 665, 211 S.E.2d 916 (1975), the Court concluded that the dicta in Colonial Pipeline is not to be followed and that delivery charges, even if separately stated, are to be included for purposes of computing sales tax. The Court in Richs adopted a "moment of purchase" test to be applied in Georgia sales and use tax computations respectively. The "moment of purchase" test is primarily directed toward when title passes. Reg. § 560-12-2-.45, essentially adopts a "moment of sale" or "moment of purchase" test.

    In the situation where an independent carrier is used to carry goods from the seller to the buyer, Reg. § 560-12-2-.45 generally imposes tax based on when title passes to the purchaser. In brief, where tangible personal property is sold at retail "F.O.B. shipping point," the buyer assumes the risk of ownership as the property leaves the seller and the buyer directly pays the carrier rather than having the charge invoiced by the seller, transportation charges are not part of the tax base. However, if the seller prepays the transportation charges in a sale which is "F.O.B. shipping point," tax is computed on the total invoice charge including transportation charges, unless a satisfactory showing is made that the seller was acting as a bona fide agent for the purchase in effecting with the carrier such transportation.

    In situations involving the sale of tangible personal property and "F.O.B. destination point," transportation charges are included in the tax base regardless whether the charges are separately stated. In short, whether or not independent carrier transportation charges are included in the base on which sale/use taxes are computed is very much a matter of form. Where it is practical as a business manner to pass the risk of loss during transportation from seller to buyer, the parties reduce the risk of imposition of sale/use tax on transportation charges. The aforementioned rules are summarized in the following chart:

    Type of Delivery Delivery Cost Are Delivery Costs Taxable?
    1. F.O.B. Shipping Point a. Buyer pays delivery cost, and assumes risk of ownership.
    b. Delivery cost is NOT stated on the invoice.     		NO.
    2. F.O.B. Shipping Point a. Buyer pays delivery cost. b. Invoice allows a credit for delivery cost paid by buyer. NO. The tax is imposed on the invoice charge, after allowing for the credit.
    3. F.O.B. Shipping Point a. Seller prepays delivery cost. b. Delivery cost is either stated on the invoice as an additional charge, or a separate charge is made therefor. YES, unless it is shown that seller acted as buyer’s agent.
    4. F.O.B. Destination a. Delivery cost is NOT stated on the invoice (seller bills the buyer separately for the delivery cost). YES.
    5. F.O.B. Destination (and seller delivers goods and assumes responsibility for shipment) a. Delivery cost is stated on the invoice. YES.


  3. Installation, Maintenance and Warranty Repair Cost. O.C.G.A. § 48-8-2(9)(B)(ii) provides that "sales price" does not include, "The amount charged for labor or services rendered in installing, applying, remodeling or repairing property sold." Although the statute appears to provide a clear exemption for the above types of services, practical difficulties arise in establishing the proper charge for installation, maintenance or warranty services which are involved in a sale of tangible personal property. A primary tax planning consideration in this area is to separately itemize the charges for installation, maintenance and warranty repair cost. The issue of required itemization was thoroughly addressed in Strickland v. Sperry Rand Corporation, 248 Ga. 535, 285 S.E.2d 1 (1981). The Court in Sperry addressed the taxability of lease payments and whether or not maintenance charges were taxable as includable in the base lease payments. In Sperry, the taxpayer separately stated varied maintenance charges with respect to the type of equipment. The Court noted that the charge was the same in either a sale or lease transaction, was based on cost analysis figures, was set by engineers rather than sales personnel and was subject to adjustment based on individual customer repair history. Sperry establishes that under O.C.G.A. § 48-8-2(9)(B)(ii) maintenance charges which are properly separated out of total customer cost are not subject to sales tax. Regulations adopted by the Department of Revenue reflect the holding in Sperry:
    Charges for labor in installing, applying, remodeling or repairing tangible personal property sold, when billed separately to the customer, are not considered a part of the sales price of the article sold. Unless such labor is separately stated in the consumer’s invoice, the total charges shall be subject to the tax. Reg. § 560-12-2-.88(2).


  4. Repair Services. O.C.G.A. § 48-8-3(23) specifically exempts from tax, "Fees or charges for services rendered by repairmen for which a separate charge is made." The requirement for itemization of the repair fees is apparent on the face of the exemption. Thus, in the repair context, tangible personal property sold to the purchaser in connection with repairs is taxable, while separately stated services rendered to install the repair part are not taxable. However, the repair exemption is subject to limitations. For example, the exemption is limited to repair work rendered in connection with the sale or lease of tangible property and does not apply in the context of fabrication, which results in such significant alteration of property that the property effectively becomes something else. With regard to this point, fabrication labor is defined in the Regulations as labor used in "the production of an article from a material or materials by giving such material or materials a new form, quality or property." Reg. § 560-12-2-.88. Additionally, the distinction between charges for tangible personal property and charges for services must be bona fide. Understatement of the price of the property and inflation of the price for the repair services could render the transaction vulnerable to audit and possible taxation of the entire transaction.


  5. Professional, Insurance or Personal Service Transactions. As mentioned on several occasions throughout this outline, the Georgia Code specifically exempts from sales and use taxation, "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made." O.C.G.A § 48-8-3(22). This exemption provides the traditional exemption under which a broad array of professional services are rendered without imposition of sales tax. In most professional service transactions, such as the rendering of medical, legal or financial services, it is clear that the professional service provider is not required to collect and remit sales tax on amounts charged to clients.

    A much closer issue may arise, however, in the context of providing other services, such as advertising services or computer-related services. For example, advertising agencies may provide marketing advice, but may also provide tangible products such as photographs, advertising layouts, and graphics. In addition, advertisers render services such as the placement of ads in newspapers and with radio stations. Reg. § 560-12-2-.02 delineates between advertising services which are not taxable and the sale of tangible personal property by advertisers which is taxable. Paragraph 1 of the Regulation provides, "The tax does not apply to charges for professional services made by an advertising agency for preparing and placing advertising in media such as newspapers, magazines, radio, television, billboards, etc." The Regulation further provides, however, that, "When an agency goes beyond the rendition of professional services and sells tangible personal property, it must register as a dealer in order to collect and remit the tax on the sale of such property. Registered dealers may purchase tangible personal property for resale by furnishing the seller with a Certificate of Exemption." The Regulations state that sales tax applies to all sales at retail of certain commercial advertising, including, but not limited to, catalogs, calendars, hand bills, novelties, etc. However, printed advertising inserts or advertising supplements distributed in Georgia in, or as part of, any newspaper for resale are exempt from Georgia sales and use tax. ." O.C.G.A § 48-8-3(61).

    In the context of computer-related services, a computer company, in addition to selling or leasing tangible personal property such as computer hardware and software, may also provide consulting services or technical support. While the sale or leasing of such tangible personal property is generally subject to sales tax, the Department of Revenue has stated that computer-related services are generally exempt from sales tax. See Letter from Georgia Department of Revenue, February 9, 1998; see also Letter from Georgia Department of Revenue, Sales and Use Tax Division, February 2, 1999 (Exhibit A). "Computer-related services" include, but are not necessarily limited to, consulting, training, support (via telephone or on-site), hardware and software maintenance, and data processing. To avoid taxability, however, the charges for the such computer-related services must be separately stated. Turning to another example, in Opinion of the Attorney General, March 18, 1969, the cost of the use of a bank’s computers by third parties who were given complete control over the computers for a given period of time constituted a lease or rental subject to sales and use tax. However, a taxable lease or rental did not occur where persons turned over their records to a bank for processing by the bank’s computers, whereby only the bank’s employees physically used the computers. In such a situation, the bank was merely performing a nontaxable service for its customers.

    In several cases, the Department of Revenue has adopted specific regulations for a particular type of service. However, general concepts can be applied in making a determination of whether a specific personal service is tax-free or is the taxable sale of tangible personal property. The criteria discussed below are often difficult to apply and are subject to manipulation. Thus, significant tax planning is available in structuring transactions so as to support a position of non-taxability.
    1. Special Knowledge or Skill. The possession of special skill or knowledge by the service provider supports characterization of a tax-free personal service transaction. The degree to which the professional requires specialized and abstract knowledge the more likely it is that the transaction will be exempt from sales tax. In the case of traditional professionals such as lawyers, physicians, accountants and architects, the sale of services is tax-free under O.C.G.A. § 48-8-3(22) even though the services often involve the sale of tangible personal property. In each of the above professions, personal property may be sold with the services, such as wills, plaster casts, financial reports and blueprints. The exemption views such personal property as tangible manifestations of the specialized skill and knowledge of the service provider and thus such tangible personal property is exempt from taxation.

      The Regulations identify several personal service transactions which are tax-free in whole or in part such as advertising, barbering and hairdressing, painting cars, directing weddings and funerals, grooming pets, interior decorating, dry cleaning, typesetting, hanging wallpaper, giving pilot lessons and providing vocational training. As in the case of the traditional professionals, the customer is receiving essentially the services of someone who has acquired skills at accomplishing a task and any tangible personal property sold in connection therewith is merely incidental to the entire transaction.

      The position taken by the Department of Revenue in distinguishing personal services and sales of tangible personal property are not always logical, however and the Regulations should be consulted in all instances. For example, a professional photographer clearly renders personal services, but the portraits he sells are nonetheless taxable under Reg. § 560-12-2-.72. Similarly, the charges rendered by a tailor for his services in creating a custom suit are taxable even though clearly the skills possessed by a tailor require special knowledge. Reg. § 560-12-2-.88.


    2. Value of the Services as Compared to Value of Tangible Property Transferred. The exemption under O.C.G.A. § 48-8-3(22) contemplates tax-free personal services when the tangible personal property transferred is an inconsequential element as compared to the entire transaction. The Court in Hawes v. Dimensions, Inc., 122 Ga. App. 190, 176 S.E.2d 602 (1970) held that the tax exempt characterization of personal service transactions is supported when the tangible property received is minimal in terms of the total price paid. However, this factor is not controlling and it’s importance depends on the particular transaction involved. For example, in the case of shoe repair, the cost of the materials may be as high as fifty percent (50%) of the price paid by the customer. Nevertheless, in a case involving shoe repair services, the Court in Craig-Tourial Leather Co., Inc. v. Reynolds, 87 Ga. App. 360, 73 S.E.2d 749 (1952) viewed the entire transaction as a service transaction.


    3. Customization for the Customer. Another factor in determining whether transactions are tax-exempt is whether the services and any tangible personal property transferred therewith are for a specific customer. For example, in the case of financial accounting, audit reports are generally prepared solely for the particular customer. In Mead Corporation v. Strickland, 247 Ga. 495, 276 S.E.2d 587 (1981), however, the Court held that the manufacturing of dies which required specialized computer services was a taxable sale of tangible personal property. The issue of specialty to the customer was also addressed in the section of this outline dealing with computer software. As discussed, the Department of Revenue takes the position that prewritten software which is modified for a specific customer is taxable while software written for a specific customer is a personal service transaction.


    4. Intent of the Parties. Georgia courts have also looked to the intent of the parties in determining whether a transaction is a personal service transaction or a sale of tangible personal property. In Craig-Tourial, supra, the Court noted that the customer viewed the transaction as a purchase of repair services as opposed to the purchase of half-soles and heels. The Court in Craig-Tourial focused on the subjective purpose of the customer, holding that the customer primarily wished to buy the services of the shoe repairman because such services could not be performed by the customer himself because he lacked the equipment, time, or skill required. The Court noted that under such circumstances, the sale of various grades or qualities of materials is really incidental to and but a means of rendering the services which the customers want. Craig-Tourial, supra, at S.E.2d 752. Unfortunately, this factor is subject to great subjectivity and is often difficult to apply. In support of Craig-Tourial, the Court in Hawes v. Dimension, Inc., supra, held that in view of the intent of the customer and the relative cost of the materials used as compared to the cost of the entire transaction, the sale of architectural services and materials were exempt from sales tax.

K. Food and Beverages.

Effective October 1, 1998, the 4% Georgia sales tax is no longer imposed on the retail sale of eligible food and beverage products purchased for off-premises consumption. The elimination of state sales tax on food and beverages was performed in three phases: (1) on October 1, 1996, the first two cents of the four cent tax was dropped, (2) on October 1, 1997, the third cent was eliminated, and (3) on October 1, 1998, the last cent was removed. Eligible food and beverage products, however, are still subject to local taxes (up to a maximum of 3%) in counties with varying sales tax rates. Thus, in Fulton County, for example, eligible food and beverages are still subject to a 3% county tax. The sale or use of food for "off-premises" consumption includes food that is a staple product for "home consumption" (e.g., meat, poultry, bread, milk, candy, canned soft drinks, etc.). Such food does not include alcoholic beverages, tobacco products, items sold hot or intended to be heated at a store, immediate consumption products (e.g., fountain drinks), and vitamins and minerals. Further, food sold for "on-premises" or immediate consumption (e.g., food served in a restaurant, coffee shop, cafeteria, etc.) will continue to be subject to state sales and use tax.

L. Certain Computer Equipment.

O.C.G.A. § 48-8-3(68), passed in the 2000 legislative session as part of Governor Barnes’ high tech initiative, creates an exemption for the sale or lease of certain computer equipment, certain high tech facilities when the total sales price or the fair market value of the leased computer equipment exceed $15,000,000 per calendar year.

M. Other Exemptions.

This outline has reviewed many of the major exemptions set forth in O.C.G.A. § 48-8-3. In the 2000 legislative session additional exemptions for certain dyed diesel fuel for commercial fishermen; equipment for certain irrigation systems; certain bullion coins and currency; certain fuel for heating and raising poultry. Several other specific exemptions are available under O.C.G.A. § 48-8-3 and it is suggested that the tax practitioner review the specific exceptions in the event an exception is available with respect to a specific taxpayer or transaction.
 

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