They’re Final!: Rolling Changes to Georgia’s Tax Apportionment Law Now in Effect
In its 2005 session, the Georgia General Assembly passed several bills that significantly reshaped the landscape of Georgia business taxation. [See *Trust The Leaders*, Issue 13, p. 8] One of those laws provides for the phase-in of a reshaped apportionment formula for corporations doing business in more than one state. Beginning in 2008, gross receipts now make up 100 percent of the Georgia apportionment factor. The amount of payroll paid to Georgia-based employees and the amount of company property located in Georgia are no longer relevant for Georgia income tax apportionment computations.
In its 2005 session, the Georgia General Assembly passed several bills that significantly reshaped the landscape of Georgia business taxation. [See Trust The Leaders, Issue 13, p. 8] One of those laws provides for the phase-in of a reshaped apportionment formula for corporations doing business in more than one state. Beginning in 2008, gross receipts now make up 100 percent of the Georgia apportionment factor. The amount of payroll paid to Georgia-based employees and the amount of company property located in Georgia are no longer relevant for Georgia income tax apportionment computations.
If a corporation transacts business only in Georgia, its corporate taxable net income is subject to Georgia corporate income tax at a rate of six percent.
If the business corporation transacts business in multiple states, each of those states can levy an income tax based upon the amount of business conducted within that state’s borders. To determine how much business is transacted within a particular state, most state revenue codes have traditionally looked at three different types of activity in their state: specifically, the concentration of personnel located in their state as represented by payroll paid to persons in that state compared to total payroll; the amount of property that a corporation has located in the taxing state compared to its total property located everywhere; and the level of sales to, or gross receipts from, customers located within that state as compared to total sales or gross receipts from all sources.
For many years, Georgia law provided that Georgia corporate income tax at a rate of six percent could be levied against Georgia taxable income. Georgia taxable income for a multistate corporation was determined by taking federal taxable income, with certain adjustments, and multiplying that number by a fraction which was determined as follows:
— all divided by three, the result of which was the apportionment factor. This formula placed an equal weight on Georgia payroll, Georgia property and Georgia gross receipts in determining the amount of taxable income that was subject to tax in Georgia. This approach was quite similar to the approach taken by most other states.
In recent years, Georgia, like many other states, has taken steps to try to entice companies to locate in Georgia by easing the tax burden on businesses with a significant Georgia physical presence. One way that Georgia tried to ease the burden on its corporate taxpayers was to modify the above apportionment formula. The above formula, which was in place for many years, placed equal weight on property, payroll and gross receipts in determining the apportionment factor. In 1996, the General Assembly changed this formula to place 25-percent weight on payroll, 25-percent weight on property and 50-percent weight on gross receipts. The effect of this change was to reduce the amount of taxable income subject to Georgia corporate income tax by reducing the resulting apportionment percentage number for companies with significant sales to customers outside of Georgia. For Georgia businesses that had a large majority of their plant and payroll located in our state but with sales in many states, the Georgia tax burden was lessened merely by this revised mathematical formula with no change in facts.
Let’s look at an example. Assume that Nightsky, Inc. is based in Georgia. Ninety percent of its property is located in Georgia, and 90 percent of its payroll goes to employees who are located in Georgia. Because Nightsky has sales throughout the Southeast, only 20 percent of its sales are to Georgia customers.
Assuming Nightsky had federal taxable income equal to $1,000,000 and no Georgia adjustments, the 1996 change in the computation of the apportionment formula without any other change in facts would reduce Georgia income tax by $7,000. Here is how:
Under the original formula, 90 + 90 + 20 divided by 3 produced an apportionment factor of .6667. Taxable income of $1,000,000 times the apportionment factor of .6667 resulted in $666,666 in Georgia taxable income. This amount times a six-percent corporate income tax rate produced a Georgia income tax liability under the old equal-weighted formula in the amount of $40,000.
Under the double-weighted gross receipts formula that began after the 1996 amendment, the computation would be as follows: 90 + 90 + 20 + 20 divided by 4 equals .55. Taxable income of $1,000,000 times the apportionment factor of .55 produces $550,000 in Georgia taxable income. This amount times the six-percent Georgia income tax rate results in tax of $33,000. The General Assembly provided this fictitious corporation with tax savings of $7,000 without any change in business-operation facts.
In its 2005 session, the General Assembly modified the apportionment formula to an entirely new level. In 2006, property represented 10 percent, payroll represented 10 percent and gross receipts represented 80 percent of the apportionment formula. In 2007, property represented only five percent, payroll represented only five percent and gross receipts represented a full 90 percent of the apportionment formula. Beginning in 2008, gross receipts now make up 100 percent of the Georgia apportionment factor. Thus, the amount of payroll paid to Georgia-based employees and the amount of company property located in Georgia are no longer relevant for Georgia income tax purposes.
Let’s look at tax year 2008. Assume our same business facts given above for Nightsky. A 100-percent gross receipts factor means that only 20 percent of Nightsky’s $1,000,000 in taxable income will be subject to Georgia tax even though 90 percent of Nightsky’s property and 90 percent of its payroll are located here. Georgia taxable income of $200,000 times the six-percent corporate tax rate produces a tax of $12,000 with no change in facts — a savings of $28,000 from the original equal-weighted apportionment formula that was the law for many years. This approach represents a tremendous incentive for businesses to expand personnel and property located in Georgia with no resulting increase in corporate income tax.
Tax Planning Tip
The apportionment formula is available only to multi-state taxpayers. The Georgia Department of Revenue takes the position that a corporation is a multi-state business only if it is subject to income or similar tax in at least one state in addition to Georgia. If the company is subject to income tax only in Georgia, then it is not a multi-state operation and the company pays six percent on its entire taxable income.
If your company is subject to income tax in Georgia only and the business generates revenue from a significant level of sales to customers located in other states, it may be of benefit to your business to establish a small sales office in one other state and to file income tax returns and pay appropriate income tax to the other state in order to be able to take advantage of Georgia’s new apportionment formula.
Let’s modify our example above. Assume that Daylight, Inc. has income tax nexus in Georgia only and has 100 percent of its payroll in Georgia, 100 percent of its property in Georgia and only 20 percent of its sales to customers located in Georgia, with the remaining 80 percent scattered evenly throughout the Southeast. With the same $1,000,000 in taxable income as Nightsky, its direct competitor, we see that Daylight is at a financial disadvantage, as it has $60,000 in Georgia income tax — six percent of its taxable income as a “Georgia only” taxpayer.
If Daylight rents a small office in another state and hires a salesperson to work from that office and make sales calls, Daylight becomes subject to income tax in the state where the sales office is located. If the state where the sales office is located uses a version of the three-factor formula, Daylight would have a very small payroll factor, a very small property factor and likely a relatively small sales/gross receipts factor resulting in a small apportionment factor to the state where the sales office is located. This small apportionment factor would result in a small amount of income tax due to that state.
More importantly, Daylight would now be a multi-state taxpayer in so far as the State of Georgia is concerned, and would be allowed to take advantage of Georgia’s new gross receipts only apportionment factor. This adjustment drops Daylight’s Georgia income tax liability from $60,000 to $12,000, with a high probability of a corresponding significant reduction in total state income tax liability ($12,000 plus some small amount from the state where the sales office is located).
Each company’s facts are different and each company’s situation will have to be reviewed to see if the approach described above will provide sufficient tax savings to make business sense, but the concept is there and, as demonstrated above, certainly well worth considering.