This Week in State Tax

By rejecting the City of Atlanta’s appeal, the Georgia Supreme Court has let stand a lower-court decision apportioning a taxpayer’s Georgia gross receipts across all office locations (both within and without Georgia) that contribute to the generation of the receipts. The case concerned the Atlanta Business Occupation Tax, which is imposed pursuant to a state enabling act. Per the enabling act, the occupation tax base is “gross receipts”, which statutorily excludes “proceeds from sales of goods or services which are delivered to or received by customers who are outside the state at the time of delivery or receipt,” effectively limiting the tax to sales to Georgia customers. When dividing receipts among jurisdictions, the statute provides that a business must either (1) reasonably allocate the dollar amount of gross receipts among its locations or offices or (2) evenly divide “the gross receipts reported to all local governments in this state” among the offices or locations that contributed to the gross receipts. The taxpayer in this case had one Georgia location, in Atlanta, and between 14 and 27 locations in other states. The taxpayer filed its occupation tax return by dividing all its gross receipts among its offices throughout the country, affirming that “each of the offices contributed to [its] business and its generation of revenue.” On audit, Atlanta asserted that gross receipts should be divided only among Georgia offices, effectively assigning all Georgia gross receipts to the lone office located in Atlanta. The taxpayer paid the disputed tax under protest and filed a lawsuit. A district court granted summary judgment to the taxpayer, and Atlanta appealed.

The primary issue before the appellate court was whether the division of income method described in the enabling act called for dividing income among all offices or only those in Georgia. Atlanta argued that, because the occupation tax base includes only Georgia receipts, only Georgia offices should be deemed to have “contributed to” the receipts. The court rejected this interpretation, reasoning that this limitation was not found in the text of the statute and that the taxpayer’s business was such that office locations in other states could also “contribute to” Georgia receipts. It also noted that the introductory language to the enabling statute refers to “businesses or practitioners with one or more locations or offices in Georgia and one or more locations outside the state,” specifically contemplating the division of income among Georgia and non-Georgia locations. Finally, it noted that similar considerations applied to the description of the occupation tax in the Atlanta municipal code.

Atlanta appealed the appellate court decision to the state supreme court, but the court declined to take up the case. Accordingly, the decision of the appellate court from 2025 stands. Contact Gregory Aughenbaugh with questions about Atlanta v. Block.

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New guidance issued by the Kentucky Department of Revenue addresses the sales tax treatment of prewritten computer software that includes artificial intelligence (AI) components. Under Kentucky law, prewritten software is classified as tangible personal property and is taxable whether delivered in tangible form or accessed remotely as software-as-a-service. “Custom software” (i.e., software specifically designed and developed to the specifications of a single purchaser) is not considered prewritten software and is therefore exempt from taxation. Prewritten software that is merely modified or enhanced on behalf of a specific customer is taxable, but separately stated charges for the modifications or enhancements are not subject to tax.

The guidance clarifies that the presence of AI features does not necessarily qualify a product as custom software. Although many AI components can alter their output based on the data or prompts received from users, the department does not consider this sufficient to meet the specific criteria to be considered custom software. Contact Dave Perry with questions on the Winter 2025/26 Edition of Sales Tax Facts.

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In a recently published decision, the North Carolina Business Court affirmed that transfers of tangible personal property from a subsidiary to its parent company did not constitute taxable sales under North Carolina law when no consideration was provided. The case arose from a Department of Revenue appeal of an Administrative Law Judge (ALJ) determination that such transfers were not subject to sales tax.

The taxpayer in this matter, a subsidiary corporation, regularly transferred emulsion products to its parent and affiliated companies without issuing purchase orders, bills of sale, or requiring payment. The taxpayer did not collect sales tax on the transfers. On audit, the department assessed tax, penalties and interest. The taxpayer appealed, and an ALJ found that no consideration was provided for the transfers, meaning that they did not constitute sales for purposes of the sales tax. The department appealed to the Business Court.

On appeal, the department argued that the taxpayer should be considered to have received consideration for the transfer of product to its parents and related parties. It argued that internal accounting entries labeled as “due to/due from,” which reflected hypothetical markups, should be treated as consideration for the transfers. Further, the department contended that various cash infusions, accounting services, and payroll payments provided by the parent to the subsidiary constituted consideration for the transfers. The court determined the accounting entries were solely for internal management purposes and did not represent any actual payment or expectation thereof. It considered the various cash infusions from the parent to the taxpayer to be reflective of the structure of the organization and determined there was no evidence that the cash infusions were specifically linked to the transfers of emulsion products, noting that there was no agreement or negotiation indicating that these infusions were provided in exchange for the transfers. The department also contended that because the subsidiary indicated the transfers were not “gifts,” they should be considered sales. The court declined to presume that the transfers were made for consideration in the absence of evidence and emphasized that North Carolina law does not support such a presumption.

In its analysis, the court reiterated that a “sale” under the North Carolina Tax Act requires a bargained-for exchange of consideration. The record demonstrated that the subsidiary did not negotiate or expect payment for the transferred products, and the parent company did not incur any obligation to pay. As such, the Business Court affirmed the ALJ decision. For any questions on N.C. Dep’t of Revenue v. Asphalt Emulsion Indus., LLC, 2026 NCBC 5, or other North Carolina sales and use tax matters, please contact Nicole Umpleby.

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The South Carolina Department of Revenue recently issued updated guidance on the state admissions tax, detailing when taxpayers should remit admissions taxes in various situations. Separately, the department also provided additional information on businesses subject to the tax.

South Carolina imposes a tax on amounts paid in exchange for the privilege to enter or use a “place of amusement.” The updated guidance explains that when businesses are selling tickets in advance of an event (e.g., the sale of season tickets to sporting events), patrons are paying to enter the place of amusement on a future scheduled date, not when the payment is made. Consequently, revenue from paid admissions for advance ticket sales must be reported with the admissions tax return for the month in which the ticketed event takes place.

The department distinguished the season ticket example from a situation in which a patron purchases a season pass to a place of amusement which allows the patron to enter amusement any time. In such cases, the place of amusement should report and remit sales tax to the department based on when the season pass is sold. Similarly, if the admissions price is paid by patrons after the event, then the place of amusement needs to report the receipts based on when the admissions prices are paid since there is no “paid admissions” until the patrons pay the admissions price. When a place of amusement sells gift certificates that must redeemed for a ticket prior to an event, the right to enter the amusement is not granted until the certificate is redeemed and the ticketed event takes place. As such, the amusement tax for such sales should be remitted based on when the event occurred. 

In a separate guidance, the department reaffirmed that any business will be considered a place of amusement if it “distracts the mind, relaxes, entertains, or gives pleasure” to patrons, and a place of amusement will not be excluded simply because the business may also have another purpose. The guidance provides a non-exhaustive list of over 30 types of businesses subject to the admissions tax, unless specifically exempt by law, including: air and balloon shows, escape rooms, automobile shows, bowling alleys, and spectator events.  Please contact Nicole Umpleby with questions about S.C. Revenue Procedure #26-2, or S.C. Revenue Ruling #26-2. 

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In response to the federal phase-out of the penny, states are continuing to provide guidance for taxpayers on handling the application of sales tax to transactions that require rounding because of the inability to make exact change. We will continue to track these through TWIST, providing a list of the states as well as links to where you can find the direct guidance.

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