Over the last week, Georgia Governor Sonny Perdue signed into law a number of tax provisions, including a provision that imposes a 20% penalty on taxpayers seeking “frivolous” sales tax refunds. Further, on May 11, 2009, the Governor vetoed a capital gains tax cut (H.B. 481), claiming that the state could not afford the expected revenue loss from the tax cut in the current economic environment. It is not expected that the General Assembly will overturn the veto.

Sales and Use Tax Refund Legislation

Georgia H.B. 441, signed by the Governor on May 5, amends Ga. Code Ann. § 48-2-35.1, relating to sales and use tax refund claims. From a taxpayer’s perspective, this new law contains both a carrot and a stick. While taxpayers now have the opportunity to expedite the payment of filed refund claims, taxpayers must also be conscious of potential civil and criminal penalties arising from refund claims that are deemed to have been “frivolously” filed.

Expedited Refunds

The carrot portion of the legislation provides taxpayers the opportunity to expedite the state’s payment of refund claims by filing a bond with the Revenue Commissioner in the amount of, and as security for, the amount of the refund. The bond must be large enough to cover any potential interest, penalties and other costs that the taxpayer may have to repay if any portion of the refund claim is ultimately denied. If a taxpayer selects the expedited process and posts the bond, the Department will pay the refund within 30 days and then have three years to audit the refund claim. The taxpayer must repay whatever portion of the refund claim is ultimately denied, or the Department may use the bond as payment.

Frivolous Refunds

The stick portion of the legislation penalizes taxpayers who are deemed to file “frivolous” sales and use tax refund claims. The provision contains both potential civil and criminal penalties. It provides that any taxpayer who files what is statutorily defined as a “frivolous claim” is subject to a penalty of 20% of the “excessive amount” or, in other words, the amount the Department ultimately denies. A claim is considered “frivolous” if less than 50% of the amount requested is actually eligible for refund. Thus, for example, if a taxpayer files a refund claim for $500,000 and only $200,000 is ultimately approved and refunded, the taxpayer may be subject to a 20% civil penalty on the amount denied ($300,000) because more than 50% of the claim was denied. The determination of how much refund is correctly due is based on the final resolution of the substantive issue(s) - including through the state’s administrative remedies or through the court system.

However, the taxpayer still has a “savings provision” opportunity to be relieved of the 20% penalty. If the taxpayer can show that it had a “reasonable basis” for any portion of the “excessive amount”—in our example, the $300,000 that was denied—the penalty would not apply to that portion of the excessive amount. Similar to the federal income tax penalty provisions contained in IRC § 6662, a taxpayer has a “reasonable basis” for a refund position if the position is based on applicable law, regulations, court cases, Attorney General opinions or certain formal guidance published by the Commissioner. Further, no penalty is assessed against any portion of an excessive amount for which a refund is claimed in good faith and the filing was not due to negligence or disregard of the law. “Reasonable basis,” “negligence” and “disregard” are all terms specifically defined in the revised statute. The determination of whether the “excessive amount” of the refund claim was filed by the taxpayer in “good faith” is determined on a case-by-case basis.

Finally, when all or part of the “excessive amount” is based on a position that is knowingly and willfully advanced by the taxpayer in “bad faith and is patently improper,” the taxpayer may be charged with a criminal misdemeanor and punished with a criminal penalty not to exceed $1,000. In previous versions of the bill, this penalty applied only upon the second excessive claim filed if not withdrawn before 30 days, but the criminal penalty was expanded to apply to the first instance of the proscribed behavior.

The provisions of H.B. 441 became effective upon the Governor’s approval on May 5, 2009.

Sutherland Observation: We believe that the Georgia Department of Revenue supported this legislation to combat what they deemed to be “kitchen sink” refund claims. Such refund claims required the Department to expend significant time and energy for an audit in which, ultimately, only a small percentage of the claim was approved. Several years ago, in conjunction with similar proposed legislation that was ultimately not enacted, the Commissioner provided a number of real examples of what were considered to be “frivolous” refund claims in a letter to the Council On State Taxation dated March 26, 2007, and published in Tax Analysts’ State Tax Today on March 28, 2007.

Many of these large sales and use tax refund claims referenced by the Commissioner were likely related to the Department’s strict interpretation of the “direct use” theory of the state’s exemption for manufacturing machinery. Effective January 1, 2009, however, legislation became effective adopting the “integrated plant” theory with regard to Georgia’s manufacturing exemption. Because this legislation greatly expanded the machinery eligible for exemption, we expect significantly less disagreement between taxpayers and the Department on the interpretation of the manufacturing exemption under “integrated plant,” and it is likely that the number of refund claims in jeopardy of falling under these frivolous refund penalties will be small. However, taxpayers that plan to file refund claims for open tax periods under the “direct use” statute should be mindful of this new legislation.

Other Changes to Refund Procedures in Georgia

In addition to imposing the frivolous claim requirements, Georgia made further procedural changes to the filing of refund claims in legislation entitled “Improved Taxpayer Customer Service Act,” which applies to income, franchise, and sales and use tax refund claims. H.B. 485, signed by the Governor on May 5, amends Ga. Code Ann. § 48-2-35 and adds the requirement that taxpayers include an “identification of the transactions being contested.” This provision requires that each claim for refund be filed in writing, include a summary statement of the grounds upon which the taxpayer relies, and an identification of the transactions being contested.

Sutherland Observation: Historically, taxpayers would file sales and use tax refund claims with an estimated refund amount and subsequently (sometimes months later) provide a spreadsheet or other documentation to support the validly filed refund claim. Under this legislation, taxpayers must concurrently provide the spreadsheet or other identification of the transactions being contested in order tohaveavalidfiledrefundclaim.

Additionally, H.B. 485 appears to change the procedure for protesting the denial of a refund claim by codifying the requirement that taxpayers protest the Commissioner’s whole or partial denial of any claim for refund within 30 days from the date of notice of refund denial or partial payment. The 30-day period may be extended by agreement between the taxpayer and the Commissioner. Previous law contained no specific time period.  

Further, the bill changes the time period taxpayers have to bring action in court to appeal the denial of a refund claim. Under the new law, taxpayers seeking judicial review have the later of two years from the Commissioner’s denial of a refund claim or 30 days after the date of the department’s notice of decision on such protest. Both time periods may be extended upon agreement in writing with the Commissioner. Under prior law, taxpayers had two years from the date the refund claim was denied by the Commissioner to bring action in court.

H.B. 485 also became effective upon the Governor’s approval on May 5, 2009.

Civil Penalties Imposed on Tax Return Preparers

H.B. 444 (codified as Ga. Code Ann. § 48-2-62) was signed into law on May 4, 2009, It provides for a civil penalty, not to exceed $500 per return, on tax return preparers where any part of an understatement of liability is due because of a “position” (as defined) taken on the return. The penalty applies to income and sales and use tax returns, and applies to both returns and claims for refund. A “position” is defined to include situations where:

  • The tax return preparer knew or reasonably should have known of the position;
  • There was not a reasonable basis for the position; and
  • The position was frivolous or not adequately disclosed in the return or claim for refund in a statement attached to the return or claim for refund.

However, no penalty will be imposed if there is reasonable cause for the understatement of liability and the tax return preparer acted in good faith.

Further, if such understatement is determined to have been caused by a willful attempt to understate the liability and a reckless disregard for the law, the tax return preparer is subject to a penalty in an amount equal to the greater of $5,000 or 50% of the income derived, or to be derived, by the tax return preparer for the return or claim for refund.

The provisions of H.B. 444 became effective upon the Governor’s approval on May 4, 2009.

Sutherland Observation: The enactment of these civil penalties imposed upon tax return preparers brings Georgia in line with many other states that have enacted such provisions and provides an additional incentive for taxpayers to contemporaneously document their filing positions.

Georgia Legislation Freezes Property Tax Increases

In light of the current economic crisis and the “reduction of value of tangible property of unprecedented magnitude,” and in an attempt to “secure the stability of all Georgians,” Georgia H.B. 233 (codified as Ga. Code Ann. § 48-5B-1) imposes a moratorium on all increases in the assessed value of all classes of tangible property that are subject to ad valorem taxation property by county and local taxing authorities. The two-year moratorium applies for taxable years beginning on or after January 1, 2009, and continues through January  2011.

The moratorium appears to apply to both real property and tangible personal property and applies even if the property is sold or transferred during the moratorium period. The moratorium does not include the correction of factual errors or omissions in the valuation of the property, or increases due to improvements to real property. Further, nothing in this legislation prohibits the assessed value of the property from decreasing.  

H.B. 233 became effective upon the Governor’s approval on May 5, 2009, and is repealed in its entirety on the second Monday in January 2011.

Sutherland Observation: Although many taxpayers will benefit from the moratorium, there is a looming question regarding the constitutionality of this provision. The state constitutional question is whether the freeze violates the “uniformity” clause of the Georgia Constitution, which requires uniform taxation of the same class of property within a taxing jurisdiction. Art. VII, Sec. I, Para III, Georgia Const. (1983).

Further, the moratorium applies only to the valuations assessed by the counties but does not restrict counties from adjusting the millage rate to make up for the valuation freezes.