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Georgia Tax Authority Explains Sales Tax Rules

The Georgia Department of Revenue (DOR) has issued several important rulings on the application of sale and use taxes to various commercial products, including online software, home construction features, and extended warranties. Businesses that offer these products and services should pay careful attention to these rulings to determine if they must collect and remit sales taxes.

Electronically Delivered Software

The proper taxation of online software and services continues to be a difficult issue for state governments. In a recent Georgia DOR ruling, No. LR SUT-2017-04, the issue was whether a company that electronically delivered software-based training courses and offered online course hosting services should collect sales tax from its customers. The DOR ruled that the software services and licenses are not subject to sales and use tax as long as the customer does not receive either prewritten computer software in a tangible form, such as on a disc, and as long as the customer does not receive a right to receive prewritten computer software in a tangible form. In other words, if a customer can choose “off-the-shelf”-type software either in an electronic download or on a disc, the seller would have to collect and remit Georgia sales tax.

Custom Storage Units for Homes

The second ruling, No. LR SUT-2017-01, involves a taxpayer that designs, engineers, manufactures, and installs custom storage products, such as closets and cabinets, in both new homes under construction and in existing homes. The taxpayer also intends to expand the business to sell assembled storage products to resellers. The issue is whether the taxpayer must collect sales tax on these activities.

The Georgia DOR ruled that the taxpayer, as a contractor, is the end user and consumer of the tangible personal property that the taxpayer buys, uses, or consumes in the performance of contracts. Therefore, the taxpayer owes sales and use tax on everything it purchases to fulfill its contractual obligations. When the taxpayer starts selling to resellers, it will not owe sales tax on its materials if it obtains a sales tax exemption certificate and the customer takes delivery in Georgia.

Extended Warranties

At issue in DOR Ruling No. LR SUT-2017-05 is a taxpayer that designs, manufactures, and markets consumer electronic devices, including mobile devices. The devices are either sold by the taxpayer or by authorized retailers and come with a one-year hardware repair warranty and 90 days of free technical support. Customers can buy an extended warranty separately to cover the devices for another year for parts, service, and technical support. The taxpayer also offers an upgrade program that allows customers to get new devices each year and requires purchase of an extended warranty.

The DOR considered which of these activities were subject to sales tax and determined that the taxpayer’s sales of extended warranty contracts are sales of a service and are not subject to Georgia sales and use tax. However, if a repair is provided under the extended warranty, the non-itemized service fee charged by the taxpayer is subject to the tax. On the other hand, enrollment in the taxpayer’s upgrade program is not subject to sales and use tax.

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