Executive summary: Georgia tax bills make noteworthy changes
On May 2, 2023, Georgia Gov. Brian Kemp signed Senate Bill 56, making a number of changes to Georgia’s tax code. In addition to updating the state’s conformity, the state has decoupled from section 174, made changes to how personal income tax rate reduction triggers are calculated and imposes the sales and use tax on certain digital products.
Georgia tax bill decouples from section 174; taxes digital goods
IRC conformity and section 174
Senate Bill 56 updates the state’s conformity for tax years beginning on or after Jan. 1, 2022 to the IRC in effect on or before Jan. 1, 2023 except for certain existing modifications. As part of that annual update, Georgia has decoupled from federal section 174 beginning Jan. 1, 2022, thus allowing state-level current expensing. Recall that the Tax Cuts and Jobs Act (TCJA) required taxpayers to capitalize and amortize research and experimental (R&D) expenditures under federal section 174 for tax years beginning after Dec. 31, 2021. While many taxpayers and advocates anticipated a delay or permanent change to those rules, Congress has not taken any recent action related to section 174. For more information on changes to section 174, please review RSM’s Section 174 Resource Center.
Individual income tax rate changes
Previous legislation enacted a flat individual income tax rate of 5.49% effective Jan. 1, 2024. A rate reduction schedule was also enacted that would allow the tax to be reduced to 4.99%, provided that certain revenue thresholds were achieved. Senate Bill 56 slightly modifies the trigger mechanism, scheduling in annual 0.1% decreases beginning in 2025 so long as the certain conditions are met.
The legislation also eliminates the state personal exemption in favor of a standard deduction, more closely following the federal scheme, effective Jan. 1, 2024. Accordingly, taxpayers may elect to itemize or claim a standard deduction of $12,000 for single filers, or $24,000 for married filers. Itemized filers are entitled to a credit of $300 per taxpayer which cannot be carried forward or refunded.
Sales tax on digital goods
Senate Bill 56 imposes the sales and use tax on certain digital goods and products provided that the purchaser or end-user receives the right of permanent use of the item and the transaction is not conditioned upon continued payment by the end user. Examples of taxable digital goods and products include artwork, photographs, periodicals, newspapers, magazines, greeting cards, video games, digital books, digital audio works and digital audio-visual works. The tax applies regardless of whether the digital good is maintained by the seller or a third party. Note that the tax on digital goods would not apply to streaming services because a subscription, i.e., continued payment, is required. The expanded tax is effective Jan. 1, 2024.
The bill also provides for a new exemption for an “internet access service,” as defined by the federal Internet Tax Freedom Act. Accordingly, an internet access services is a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information and other services as part of a package of services offered to consumers.
Finally, the exemption for prewritten computer software transferred electronically remains largely unchanged, but is clarified to exclude the sale of specified digital goods or products as discussed above.
The bill makes relatively minor business tax changes, although some may be salient for some taxpayers. The changes to section 174 conformity may impact taxpayers with significant research expenses in 2022. While Congress has indicated an intent to consider taxpayer-friendly changes, it has not done so for 2022 as of the date of this article. Taxpayers should be cautious that not all states conform to section 174, and a few states have previously decoupled. The individual income tax changes more closely mirror the federal scheme. Additionally, a separate bill signed earlier by the governor provides one-time tax rebates between $250 and $500 depending on how taxpayers have filed.
Finally, Georgia joins over 30 other states that impose a sales tax on digital products of some variety. Noteworthy, electronically downloaded software remains exempt, but taxpayers should take note of how broad the tax is on digital goods and products and should plan accordingly. Taxpayers with questions should consult their Georgia state and local tax advisor for more information.