Expert Analysis of the Numerator of the Gross Receipts Factor and its Application to the Georgia R&D Tax Credit

I. Executive Summary: Definition and Strategic Relevance

The Numerator of the Gross Receipts Factor, as defined under Georgia law, represents the total gross receipts derived from the taxpayer’s business done within the State of Georgia during the taxable period, determined by specific destination and market-based sourcing rules under O.C.G.A. § 48-7-31.1 This critically sourced figure is statutorily mandated by O.C.G.A. § 48-7-40.3 to serve as the exclusive metric, termed “Georgia gross receipts,” for calculating the crucial Base Amount component of the Georgia Research and Development (R&D) Tax Credit.3

A. Strategic Overview: The Importance of Single-Factor Linkage

Georgia utilizes a single-factor apportionment formula based exclusively on gross receipts for determining the portion of a multistate corporation’s net business income subject to Georgia corporate income tax.5 This structure, established for years beginning on or after January 1, 2008, requires that the net business income remaining after separate allocation of non-business income be multiplied by the Georgia Ratio, which is simply the Gross Receipts Factor.6

The statutory decision to explicitly tie the R&D credit base calculation to this existing single-factor numerator creates a profound compliance linkage. O.C.G.A. § 48-7-40.3(1) dictates that “Georgia gross receipts” for R&D purposes shall be identical to the apportionment Numerator.3 Consequently, the complex, often heavily contested, sourcing regulations developed by the Georgia Department of Revenue (DOR) for corporate income tax apportionment are directly imported and applied to R&D tax credit compliance. This demands precise adherence to the DOR sourcing methodology for all revenue types, including tangible personal property, services, and intangibles, across the current year and the three preceding tax years used in the credit calculation.1

II. Statutory Framework: Defining the Gross Receipts Factor Numerator (O.C.G.A. § 48-7-31)

A. Core Statutory Definition and Purpose

The statutory foundation for the Georgia Gross Receipts Factor is located in O.C.G.A. § 48-7-31. The Gross Receipts Factor itself is defined as a fraction: the numerator is the total gross receipts from business done within this state during the tax period, and the denominator is the total gross receipts from business done everywhere during the tax period.1

For purposes of the Numerator, the focus is on defining what constitutes “gross receipts from business done within this state.” Receipts are generally included in this numerator if they are derived from customers within Georgia or if the receipts are otherwise attributable to Georgia’s marketplace.1

B. Statutory Inclusions and Exclusions from Apportionable Gross Receipts

The definition of “gross receipts” for apportionment purposes is broad, encompassing all receipts received from activities that constitute the taxpayer’s regular trade or business.1 Specifically, this includes total income before any deduction for the cost of goods sold or expenses incurred.9 Relevant inclusions cover proceeds from commissions on sales of property, goods, or services; fees charged for services rendered; and proceeds from rent, interest, royalty, or dividend income, provided they are related to the active trade or business.9

Certain revenue streams are explicitly excluded from the gross receipts calculation, ensuring the resulting figure accurately reflects the taxpayer’s operational marketplace engagement. These mandatory exclusions prevent sales, use, or excise taxes from inflating the receipts base.9 Furthermore, sales returns, allowances, and discounts must be subtracted, and payments made to a subcontractor or an independent agent for services contributing to the gross receipts in question are also excluded.6

C. Exclusion of Investment Income

A critical statutory distinction separates apportionable business income from allocable non-business income. Interest received on bonds held for investment and income received from other intangible property held purely for investment are specifically designated as not subject to apportionment.1 Similarly, rentals received from real estate held purely for investment purposes and not used in the operation of any business are not apportionable.2

This explicit exclusion of passive investment income 2 ensures that the resulting Georgia Gross Receipts Numerator—the figure that becomes the R&D credit base—is concentrated strictly on active business income. This policy determination aligns the state’s R&D incentive with verifiable marketplace engagement within Georgia, confirming that the state intends to reward innovation relative to operational revenue, rather than passive capital accumulation. Therefore, any receipts that are separately allocated (typically based on the situs of the corporation) must be excluded entirely from the Georgia Gross Receipts figure utilized in the R&D tax credit base calculation.

III. Sourcing Methodology: Attributing Receipts to Georgia (DOR Guidance and Rule 560-7-7-.03)

The process of determining which receipts belong in the Numerator hinges entirely on Georgia’s sourcing methodology, which combines elements of destination-based sourcing for goods and market-based sourcing for services and intangibles.

A. Sales of Tangible Personal Property (TPP): Destination Sourcing

For sales of tangible personal property, Georgia employs destination-based sourcing. Receipts are sourced to the state—and thus included in the Numerator—only if the products are shipped to customers in this state, or delivered within this state to customers.1 This principle mandates that the sales tax rate and sourcing are determined by the ship-to address on all taxable sales.10

A distinguishing feature of Georgia law is the “throw-out” distinction, which prevents receipts from inflating the denominator without providing a corresponding benefit to Georgia. The law specifically excludes receipts from sales negotiated or effected through offices of the taxpayer outside this state, even if delivered from storage in Georgia, if the delivery is to customers outside this state.1 This provision reinforces the principle that only sales delivered to Georgia customers count in the Numerator.

B. Sourcing of Services and Intangible Property: Market-Based Sourcing

Receipts derived from activities outside of TPP sales, such as services and the sale or licensing of intangible property (excluding investment income), must be sourced using market-based attribution. Under O.C.G.A. § 48-7-31, these receipts are included in the Numerator if they are attributable to Georgia’s marketplace.1

1. Services Sourcing: The Benefit Received Rule

The most complex sourcing provision pertains to services. According to Georgia regulations (Ga. Comp. R. & Regs. 560-7-7-.03), if the recipient of the service receives some of the economic benefit of the service in Georgia, the gross receipts are included in the Numerator of the apportionment factor in proportion to the extent the recipient receives the benefit of the service in Georgia.6

This proportional market sourcing requirement represents a significant compliance hurdle for taxpayers. Unlike the binary sourcing for TPP, service and digital economy providers must develop sophisticated methodologies—often relying on location of customer usage, demographics, or contractual provisions—to accurately track where the economic value of the service is consumed.6 The requirement for proportionality means that a service provider serving a nationwide client that uses 10% of the service benefit in Georgia must source 10% of that receipt to the Georgia Numerator.

2. Intangibles Sourcing

Receipts derived from the licensing, sale, or use of non-investment intangible property (e.g., patents, trademarks, software licenses) are sourced to Georgia based on the location of the customer’s ultimate use or consumption of the intangible asset.1 Specific rules also apply to receipts derived from customers’ credit card operations, where the principal office of the customer’s credit card operation determines the sourcing location.1

C. Sourcing of Leases and Other Receipts

For other receipts, specific regulatory guidance applies:

• Lease of Tangible Personal Property: Receipts received from the lease of fixed TPP are considered Georgia gross receipts if the property is located within the state.11
• Mobile Property: For mobile or movable property (such as construction equipment or trucks) that is located both within and outside the state during the tax period, the receipts are determined for the Numerator based on the total time the property spent within Georgia, or another reasonable method approved by the Commissioner that accurately reflects the property’s usage in the state.11

The documentation requirement imposed by the proportionate market-based sourcing for services based on “benefit received” is crucial to the R&D tax credit calculation. The accuracy of the Georgia Gross Receipts Numerator is directly dependent on the rigorous application of these sourcing rules across the four relevant years (current and three preceding years). Therefore, an audit challenging the apportionment methodology directly challenges the accuracy of the Georgia Gross Receipts used in the R&D credit base calculation.4 Taxpayers must maintain documentation supporting the economic rationale for attributing service and intangible receipts to Georgia to mitigate assessment risk.

Table 1: Georgia Gross Receipts Numerator Sourcing Rules (O.C.G.A. § 48-7-31)

IV. The Critical Role of Georgia Gross Receipts in the R&D Tax Credit Base (O.C.G.A. § 48-7-40.3)

A. Mandatory Statutory Linkage

The Georgia R&D tax credit is structured to incentivize research and development spending that exceeds a historical threshold, known as the Base Amount.12 The calculation of this Base Amount is entirely dependent on the accurate identification of “Georgia gross receipts.”

O.C.G.A. § 48-7-40.3 provides the mandatory statutory instruction for this calculation, explicitly defining the revenue base: “Georgia gross receipts” shall be “the numerator of the gross receipts factor provided in subsection (d) of Code Section 48-7-31”.3 This cross-reference eliminates any ambiguity regarding the definition; the apportionment rules must govern the tax credit calculation.

B. Calculation of the Base Amount Formula

The Base Amount is determined by multiplying the current taxable year’s Georgia Gross Receipts (GR) by the lesser of two defined ratios 4:

1. The average ratio of the business enterprise’s aggregate Georgia Qualified Research Expenses (QREs) to Georgia Gross Receipts for the three immediately preceding taxable years (the 3-year lookback ratio).
2. A statutory cap of 0.300 (30%).4

It is essential to note that while the Georgia QREs have the same meaning as those defined in IRC Section 41, they must be strictly limited to wages paid and purchases of services and supplies for research conducted within the State of Georgia.4

C. Compliance Risk from Sourcing Errors

The foundational dependence of the R&D tax credit on the Georgia Gross Receipts Numerator introduces a heightened risk related to apportionment accuracy. An inconsistency or error in sourcing receipts (e.g., misapplying the destination rule for TPP or the benefit-received rule for services) affects not only the current year’s apportionment factor but also the R&D credit base across four years of data.

Specifically, the accuracy of the Numerator affects:

1. The current year GR figure, which is the primary multiplier for the base amount.
2. The GR figures for the three prior years, which form the denominator of the historical QRE-to-GR ratio.8

If the Numerator for any of these four years is inappropriately inflated (e.g., by improperly including non-Georgia sourced receipts), it results in an artificially high Base Amount.8 An elevated Base Amount reduces the “excess QREs,” thereby limiting the total credit earned. The taxpayer must ensure that the sourcing methodology applied to determine the Numerator is consistent and justifiable across all four years analyzed.

D. Addressing Lack of Historical Data (Startups)

Georgia law provides a special rule for business enterprises lacking sufficient historical data. If a business enterprise had no Georgia gross receipts during any one or more of the three preceding tax years, the base amount calculation removes the historical average comparison.4 Instead, the base amount defaults to the product of the current year Georgia gross receipts multiplied by the statutory cap of 0.300 (30%).4

This statutory application establishes a significantly higher initial barrier for new or rapidly expanding companies. For an established company with historically low R&D intensity, the average ratio might be relatively low (e.g., 5%) 8, resulting in a minimal Base Amount and maximizing the pool of QREs eligible for the 10% credit. Conversely, a startup company automatically faces a mandatory 30% ratio.4 This means the startup’s current year QREs must exceed 30% of its Georgia Gross Receipts before any credit can be generated, potentially limiting the immediate utility of the credit compared to established firms, despite the general objective of the credit to incentivize new R&D spending.12

V. Practical Application: Detailed Calculation Example and Compliance

To demonstrate the crucial integration of the Georgia Gross Receipts Numerator, consider an illustrative scenario involving a multi-state technology firm.

A. Illustrative Scenario and Data Summary

The technology firm has rigorously sourced its Georgia Gross Receipts (the Numerator) according to O.C.G.A. § 48-7-31 and DOR market sourcing guidance, focusing exclusively on in-state sales of tangible or intangible property, and proportional attribution of service receipts.8

B. Step-by-Step R&D Base Calculation

The calculation proceeds using the Georgia gross receipts figures derived from the apportionment Numerator:

1. Calculate Historical Ratios (QRE/GR)

• PY-3 Ratio: $500,000 QREs / $9,000,000 GR $\approx 5.56\%$
• PY-2 Ratio: $300,000 QREs / $7,000,000 GR $\approx 4.29\%$
• PY-1 Ratio: $400,000 QREs / $8,000,000 GR $\approx 5.00\%$

2. Calculate Average Ratio

$$\text{Average Ratio} = \frac{(5.56\% + 4.29\% + 5.00\%)}{3} \approx 4.95\%$$

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3. Determine Applicable Ratio

The Applicable Ratio is the lesser of the Average Ratio (4.95%) or the Statutory Cap (30.0%).4

$$\text{Applicable Ratio} = 4.95\%$$

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4. Calculate Base Amount

The Base Amount is calculated by multiplying the Current Year Georgia GR by the Applicable Ratio.

$$\text{Base Amount} = \$10,000,000 \times 4.95\% = \$495,000$$

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5. Calculate Excess QREs and Credit Earned

The credit is calculated on the amount by which current QREs exceed the Base Amount.

$$\text{Excess QREs} = \$1,500,000 – \$495,000 = \$1,005,000$$

$$\text{R\&D Credit Earned} = 10\% \times \$1,005,000 = \$100,500$$

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The results of the calculation are summarized below.

Table 2: Illustrative Calculation of the Georgia R&D Tax Credit Base Amount

C. Credit Limitations and Carryforward

The credit calculated must adhere to statutory limitations. The total credit taken in any one taxable year may not exceed 50% of the business’ Georgia net income tax liability remaining after all other credits have been applied.5

A significant strategic benefit of the Georgia R&D credit is its monetization feature. Any unused credit may be carried forward for 10 years.5 Furthermore, excess research tax credit earned in taxable years beginning on or after January 1, 2012, may be used to offset state income tax withholding liability.5 This excess credit election provides a current, non-refundable cash benefit to companies, even those with limited or zero net income tax liability in the current period. To claim the credit, the company must submit Form IT-RD along with Federal Form 6765 with its Georgia income tax return.12

VI. Conclusion and Compliance Summary

The meaning of the Numerator of the Gross Receipts Factor, when applied to the Georgia R&D tax credit, is far more than a simple revenue calculation; it is the lynchpin connecting Georgia’s complex corporate apportionment laws to its economic development incentives. The Numerator is defined as the total of Georgia-derived gross receipts, determined by a dual sourcing methodology—destination-based for tangible goods and market-based (proportional benefit received) for services and intangibles.1 This sourced figure forms the mandatory base (“Georgia gross receipts”) for determining the Base Amount, which ultimately dictates the volume of Qualified Research Expenses eligible for the 10% credit.3

Due to the reliance on a single-factor apportionment regime and the statutory mandate to use the Numerator definition for the R&D credit base, meticulous compliance is paramount. Taxpayers must possess robust, documented methodologies that support the sourcing of all receipts across the four relevant tax years. Failure to accurately source service and intangible receipts, in particular, propagates errors across the base calculation, potentially inflating the Base Amount and limiting the credit available. Taxpayers should ensure that their documentation can justify the economic attribution of service benefits to Georgia to fully maximize and sustain the claimed R&D tax credit benefit.

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