Georgia companies that make electronic products should carefully consider how those products are delivered, as it has important tax consequences. Generally speaking, Georgia taxes the retail purchase, retail sale, storage, use, and consumption of tangible personal property; it does not, however, typically tax the sale of services or intangible personal property.
Usually it is easy enough to distinguish between tangible personal property and a service. For example, the sale of a hot dog (tangible personal property) is probably subject to Georgia sales tax; getting paid to cook the hot dog, on the other hand, is a service and is generally not subject to a sales and use tax.
If personal property is intangible, that is, if it cannot be touched and does not have physical presence, it is generally not subject to sales or use tax in Georgia. For example, a program downloaded from the Internet to a personal computer is intangible, and its sale will not be taxed.
Distinguishing between tangible personal property, intangible personal property, and services is not always clear-cut, especially in the digital age. The increasing use of the Internet to buy and sell products and the increase in sales of electronic products has created uncertainty for many businesses. In fact, in Georgia, the way an electronic product is delivered to a client may result in different tax treatment.
Recently, the Georgia Department of Revenue (“GDOR”) has attempted to clarify the issue as to when an electronic product will be taxed. Georgia addressed the case of a creative services agency that made custom videos for corporate clients—none of the videos were pre-produced or re-used, each was created to match the specifications of the individual client. Sometimes these videos were delivered to clients in an electronic format, such as an attachment to an email for a downloadable file, and sometimes the videos were delivered on a tangible storage medium, such as a DVD, thumb drive, or portable hard drive.
GDOR held that videos delivered electronically were not tangible personal property, and therefore were not taxable; however, when videos were delivered on a storage medium like a thumb drive, they were considered tangible and therefore, possibly subject to taxation. In this case though, because the videos were custom-made for each client, it was determined that the company was selling a service that was not taxable. The storage medium for the service – be it a thumb drive, DVD, or external hard drive – was an incidental and inconsequential element of the sale of the service. Even if the company sold the customer multiple copies of the custom-made video on multiple thumb drives, GDOR would still consider it a nontaxable sale of a service.
GDOR noted that, if the company does not charge the client separately for the storage medium, the company will have to pay sales and use tax on its purchase of the storage medium. If the company does charge the client separately for the storage medium, then the company could purchase the storage medium tax free for resale and collect sales tax from the client.
There is a catch. If the company were to start selling videos designed for general distribution, that is, not tailored to the specific needs of each client or sold to someone other than the client for whom the video was created, and if the videos were sold on a tangible storage medium, then they would be considered tangible personal property and their sale would be subject to sales and use tax in Georgia.
The Georgia Department of Revenue’s letter ruling offers guidance for companies that sell electronic products of any type. Sparks Law recommends discuss your options with legal counsel now to reduce your tax liability and ensure compliance with the law.