By Tina M. Chunn, SALT Senior Manager
The Georgia Film Credit was established to create economic growth by enticing the entertainment industry to engage in production activities in the state. To accomplish this purpose, only those production expenditures that are “incurred in the state” are eligible for the credit. With regard to purchases and rentals of property, the regulations explain that such expenditures are incurred in the state if the property is used in Georgia and is purchased/rented from a “Georgia vendor.” A “Georgia vendor” is defined as a vendor that (i) sells or rents property in the ordinary course of business and (ii) has a physical location in Georgia with at least one employee working at such location on a regular basis. However, “a vendor that acts as a conduit to enable purchases and rentals to qualify that would not otherwise qualify shall not be considered a Georgia vendor with respect to such purchases and rentals.”
On March 7, 2018, the Georgia Department of Revenue (“Department”) released Letter Ruling LR IT-2017-02 (the ruling is dated May 17, 2017), in which it addressed whether a vendor qualified as a Georgia vendor or a conduit pursuant to the facts summarized below.
The vendor is Georgia company with an office, one regular employee, and some basic inventory in the state. The vendor procures items such as specialty wardrobe, period prop pieces, custom effect pieces, etc. for production companies. Some requests are fulfilled using its own inventory while other hard-to- find items are obtained through a nationwide network of suppliers and are delivered to Georgia for use in Georgia productions. The vendor bears financial risk and risk of delivery on all items. Further, the contract with the supplier is in the vendor’s name, and the vendor charges, collects, and remits applicable sales tax on all items sold or rented to its clients (i.e., the production companies).
The ruling request included two examples. In the first, a production company required a very specialized, unique period wardrobe for 300 extras that could not be located through its usual costume supplier. The vendor purchased such items from an out-of-state supplier and had the supplier ship the items directly to the production company at its Georgia production site. The vendor invoiced the production company from its in-state office and charged the appropriate sales tax. In the second example, a production company needed a special type of military tank. Vendor did not have that type of tank in its inventory so it rented the tank from an out-of-state supplier, and arranged for the supplier to deliver it to the production company’s Georgia filming location. The vendor invoiced the production company from its in-state office, and charged a rental fee and handling fee plus applicable sales tax.
The Department explained that in order to be a Georgia vendor in regard to the purchase and rental of property, the vendor must carry the specific items in its own regular inventory. Therefore, in the case of both examples, the Department ruled that the vendor acted as a conduit and is not a Georgia vendor. Accordingly, the production company’s expenditures for these items are not eligible for purposes of the film tax credit. However, any expenditure for items purchased/rented that are supplied by a vendor that is physically located in Georgia and from such vendor’s regular inventory are eligible for purposes of the film tax credit.
In light of this ruling, production companies should investigate the origin of property that is purchased or rented from a vendor that is located in Georgia. Not all such expenditures will qualify for the film tax credit. This level of scrutiny is more involved and gives rise to additional factors in vendor selection. Have a preferred vendor is fine, but given the choice between the preferred vendor who must obtain your props from an out-of-state supplier and another local vendor who has those props in its regular inventory, you are likely better off choosing that other vendor, even if it costs more. The SALT Team at Aprio has experience assisting production companies with the Georgia film tax credit in order to ensure that they are maximizing their benefits under these rules.