By Eric Tresh

Eric Tresh
Eric Tresh

The city of Sandy Springs imposes a business and occupation tax on the gross receipts of businesses operating in the city. However, a recent change in the city’s application of that tax has sent a chill through Sandy Springs’ business community. The city’s new tax position may ultimately cause some of Sandy Springs’ most highly regarded businesses to relocate elsewhere.

For many years, cities throughout Georgia have imposed gross-receipts-based taxes on businesses based on sales of goods or services to customers within their cities. Most businesses view these taxes as fair compensation for use of local public services like roads, police and fire support.

However, in an alarming expansion of that practice, Sandy Springs has come up with a new twist on its business and occupation tax, claiming that it is entitled to tax gross receipts from sales of services to customers located outside the city. To enforce its new tax position, the city contracted with private auditors from Alabama who are paid based on a percentage of the new taxes they assess on Sandy Springs businesses.

As a result of the city’s aggressive tactics, businesses headquartered in Sandy Springs have seen their tax bills rise overnight by several hundred percent.

By aggressively assessing millions of dollars of additional tax on local businesses, the city risks driving those businesses away and costing the city valuable jobs and tax revenue. Additionally, businesses that once considered locating in Sandy Springs are reassessing whether a Sandy Springs location makes economic sense.

Implication of the tax

There are serious legal, economic and policy issues with the city’s application of its business and occupation tax.

The first issue is that the city’s application of the tax is inconsistent with the plain language of the Sandy Springs ordinance. The ordinance imposes the tax on gross receipts from sales of goods or services to customers within Georgia and excludes receipts from sales to customers outside the state. Although the ordinance is clear that the tax should not apply to receipts from sales of services delivered to or received by customers outside Georgia, the city has assessed tax on out-of-state sales.

A second problem with the tax is that Sandy Springs companies with business locations outside Georgia run the risk of having the same sales subject to multiple local business license taxes.

Consider, for example, a company headquartered in Sandy Springs that provides services to customers in Nashville, Tenn. Under the city’s application of the tax, all the receipts from the sale of services to Nashville customers are subject to the Sandy Springs tax. However, if the company has an office in Nashville, the receipts from these same sales would also be subject to Nashville’s local business activity tax.

Despite the risk that businesses headquartered in Sandy Springs could pay multiple taxes on the same receipts, the city has nonetheless stood by its application of the tax. This approach is inconsistent with sound tax policy and likely violates the United States Constitution.

Direct conflict with state policy

Sandy Springs’ tax policy conflicts with Georgia’s tax policy, which was adopted to encourage business location and expansion in the state. After years of extensive analysis, Georgia adopted a “market sourcing” tax policy to encourage business expansion and relocation of service businesses to the state.

Market sourcing means that taxpayers allocate sales of services to the state where the customer receives the benefit of those services. In contrast, Sandy Springs seeks to tax sales based on where the taxpayer’s costs of generating those sales are located. Sandy Springs’ approach essentially imposes a higher tax on businesses that employ people and make capital investments in the city. Companies locating in Atlanta, Dunwoody and other cities in Georgia are not taxed in the same manner.

Impact of tax on local economy

While the legal issues associated with the Sandy Springs tax are concerning, the economic problems created by the city’s tax will likely cause the most serious long-term repercussions. The simple fact is that taxes impact business decisions.

The Sandy Springs approach has been rejected by other cities and states throughout the country for the very reason that it discourages investment. The city’s interpretation of the tax damages the city’s competitive standing, relative to other state and local jurisdictions.

While the mayor and the city’s attorneys are quick to point out that the tax is capped at $400,000, such an explanation is misleading because the cap actually applies to each legal entity even if they are part of the same business. Therefore, if a Sandy Springs business has five entities located in the city, each entity could be required to pay $400,000 for a total company liability of $2 million.

Many of Sandy Springs’ businesses have multiple legal entities, which means they could be liable for millions of dollars in tax every year.

And even if a business’s tax liability were “only” $400,000, how many more jobs could businesses create with an additional $400,000 every year? How much more space could they rent? How much more investment could they make?

The sheer burden of the tax on businesses, coupled with the potential for multiple legal challenges to the tax, will likely hinder the city’s economic growth as businesses question whether locating in Sandy Springs is a good idea. Many businesses maintain geographically mobile capital, labor and consumption. If the city’s overall business climate becomes unfavorable, businesses may simply choose to move or not locate in the city in the first place.

No one understands better the damage of the city’s tax than the very businesspeople whose companies and families have contributed to the city’s economic development for years. It is not too late to alleviate the chilling effect of the tax on the city’s business climate. Sandy Springs should consider revising its tax laws and regulations as well as the application of the business and occupation tax to place it in line with other cities and the sound tax policy adopted by Georgia.

The Sandy Springs business community looks forward to continuing to work together with the city to develop a pro-business tax policy that will also stimulate the city’s economic development.

Eric Tresh is a tax attorney with Sutherland, Asbill & Brennan LLP. He represents many Sandy Springs businesses in discussions regarding the city’s business and occupational taxes.