Can an IT-services LLC qualify for Georgia's high-technology computer-equipment exemption when it serves only affiliated member companies?

Plain-English summary

The new LLC could qualify for Georgia's high-technology computer-equipment exemption if it was created and operated as described. It would operate at one physical Georgia location under NAICS code 541512, Computer Systems Design Services, one of the classifications listed in the exemption.

The fact that the LLC initially provided IT and business-process services only to its affiliated member companies did not disqualify it. The Department's rule did not require a qualifying company facility to conduct a majority of its business with nonaffiliated entities. The ruling also relied on the stated assumptions that the assets met the definition of computer equipment and their sales exceeded $15 million.

Common questions

Q: Did serving only affiliates prevent qualification?

A: No. The Department said a qualifying company facility did not need to conduct most of its business with nonaffiliated entities.

Q: Was the exemption unconditional?

A: No. The LLC had to be created and operated according to the represented facts, including its qualifying facility classification, and the ruling assumed the computer-equipment and $15 million requirements were met.

Citations and references

• O.C.G.A. § 48-8-3(68)(A) -- high-technology computer-equipment exemption
• Ga. Comp. R. & Regs. r. 560-12-2-.107(2)(c), (2)(e), (4)(f) -- qualifying company facility

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2016-05

Original ruling text

Georgia Letter Ruling: LR SUT-2016-05
Dated: February 23, 2016
Topic: High Tech Exemption
This letter is in response to your request for guidance on the application of Georgia sales and use tax to the sale of
computer equipment to a business process and information technology service company that deals solely with
affiliated entities.
Facts Presented by Taxpayer
Taxpayer is in the process of forming a new legal entity (hereinafter “Entity”) in partnership with certain other
independent [Redacted Distributors]. Entity will be organized as a [Redacted State] limited liability company (“LLC”)
that will be taxed as a partnership for federal and Georgia income tax purposes. The purpose of Entity is to provide
business process and information technology services to its members. It will be operating under NAICS Code 541512,
“Computer Systems Design Services,” and will provide a complete service catalog that includes software
development, support processes, and other IT operation services to Taxpayer and, initially, other independent
[Redacted Distributors] . Entity will have the flexibility in the future to expand its membership and extend its service
offerings to additional Taxpayer [Redacted Distributors], and it is expected that these future users will become partial
owners.
Entity will operate as a for-profit entity that provides services to its members on a cost pass-through basis. The initial
capital contributions for the formation of the new entity are estimated as [Redacted] % Taxpayer and [Redacted] %
from the other [Redacted Distributors]. Two of the independent [Redacted Distributors], are owned in part by The
Taxpayer. These ownership percentages are approximately as follows: Taxpayer – [Redacted] % and [Redacted Other
Owner] – [Redacted] %. Should these indirect interests in Entity be attributed to Taxpayer, its total ownership (based
on value) in Entity would be approximately [Redacted] % to [Redacted] %.1 Members’ distributive share of income
or losses from Entity will be determined by reference to their volume participation. Voting is pro rata based on a “one
member one vote” principle. Accordingly, Taxpayer will initially have approximately a [Redacted] % voting interest
in Entity.
Taxpayer intends to sell certain computer hardware (various computer equipment, servers, mainframe computers, etc.)
and software assets (hereinafter “High Tech Assets”) to Entity. The total value of the High Tech Assets is presently
believed to be approximately $[Redacted amount greater than 15 million].2 To finance the initial purchase, Entity will
issue a note to Taxpayer. All High Tech Assets are currently located at Taxpayer’s high technology facility in
[Redacted] County, Georgia. The High Tech Assets will be sold in-place to Entity and Entity will lease the portion
of Taxpayer’s facility where the assets are housed.
Issue(s)
Will Entity, as a legal entity, qualify for the high-technology computer exemption set forth in O.C.G.A. § 48-8-3(68)
such that no sales or use tax will be owed on the transfer of the High Tech Assets? 3
Analysis
O.C.G.A. § 48-8-3(68) provides a sales and use tax exemption for the
sale or lease of computer equipment to be incorporated into a facility or facilities in this state to any
high-technology company classified under North American Industrial Classification System code
[hereinafter “NAICS code] 51121, 51331, 51333, 51334, 51421, 52232, 54133, 54171, 54172,
334413, 334611, 513321, 513322, 514191, 541511, 541512, 541513, or 541519 where such sale of
computer equipment for any calendar year exceeds $15 million . . . .” 4

It is possible that the fair value of Taxpayer’s interests in [Redacted] may vary slightly at the time the asset transfer
that is the subject of this ruling request occurs; however, for purposes of this ruling, it can be assumed the value will
be less than 80%.
2
In no event will the amount be less than $15 million.
3
According to Taxpayer’s facts, the High Tech Assets to be purchased and used by [Redacted] exceed the $15
million threshold and meet the statutory definition of “computer equipment.” The only remaining issue, therefore, is
whether [Redacted] qualifies for the exemption.
4
O.C.G.A. § 48-8-3(68)(A).
1

Georgia Letter Ruling: LR SUT-2016-05
Dated: February 23, 2016
Topic: High Tech Exemption
Page 2 of 2

Department of Revenue Rule 560-12-2-.107 defines “high-technology company” as “a company or specific company
facility that has been assigned a classification code as specified in O.C.G.A. §48-8-3(68)(A).”5 A “company facility”
is “a single physical establishment, as defined in the North American Industrial Classification System United States
Manual 1997, where the primary business activity is designated within the classification codes as specified in
O.C.G.A. §48-8-3(68)(A) and approved by the commissioner.”6 To the extent that Entity operates as a single physical
location under NAICS code 541512, “Computer Systems Design Services,” Entity will meet the definition of
“company facility.” As a company facility, Entity is not required to conduct a majority of its business with nonaffiliated entities.7

Ruling(s)
Entity will qualify for the high-technology computer exemption set forth in O.C.G.A. § 48-8-3(68) to the extent that
it is created and operated in accordance with the facts presented by Taxpayer.
The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions, facts, circumstances, and taxpayer in question. Should the circumstances regarding the
transactions change or differ materially from those represented, this ruling may become invalid. Subsequent statutory
or administrative rule changes or judicial interpretations of the statutes or rules upon which this ruling is based may
subject similar future transactions to different tax treatment than that expressed in this ruling.

5

Ga. Comp. R. & Regs. r. 560-12-2.107(2)(e).
Ga. Comp. R. & Regs. r. 560-12-2.107(2)(c).
7
Ga. Comp. R. & Regs. r. 560-12-2.107(4)(f).
6