State Tax Considerations for Renewable Energy Products
The landscape for renewable energy is subject to constant change. Significant portions of the renewable energy industry became economically viable due to federal and state incentives, including tax credits, grants and loan guarantees.
Political and economic pressures to reduce dependence on non-renewable energy sources such as oil, natural gas and coal, as well as increasing public concern about the consequences of global warming contributed to the creation of these incentives. Government spending in this area was also seen as a potential method to create jobs during the downturn of the economy.
One of the most successful of the incentive programs, the Federal 1603 grants, also known as "cash-in-lieu of tax credits," has provided almost $9.2 billion of investment in renewable energy projects. The 1603 grant program is due to terminate on December 31, 2011; however, other federal and state incentive programs may remain and yet others will be added.
The bankruptcies of Solyndra and Beacon Power with $528 million and $43 million in federal loan guarantees, respectively, have raised serious doubts in the public’s mind about the nature and cost of incentives. Without the federal 1603 grants, investment will largely depend on the investor’s ability to use the tax credits often either directly or by involving tax equity investors. While navigating the federal incentive programs can be complex, evaluating the state incentives and taxation may provide even more of a challenge.
More than half of the states and the District of Columbia have imposed Renewable Portfolio Standards (and another eight states have voluntary goals) requiring electric utilities to use renewable energy or acquire renewable energy credits (RECs) for a minimum amount of generating capacity. These requirements necessitate the continued investment in renewable energy projects.
The states have various incentive vehicles to encourage the development of renewable energy projects including:
- Income Tax Credits
- Sales and Use Tax Credits
- Property Tax Credits
- Subsidized Project Financing
- Project Development Bonds
- Production-Based Credits
A single project often qualifies for multiple incentive programs. Utilization of these incentives necessitates a careful review of each program to maximize savings; however, participation in one program may bar participation in others.
State Tax Considerations
With increasing federal and state deficits, there is growing concern regarding the funding of the incentive programs. There is also increased pressure for states to boost tax revenue to reduce deficits. Sales and use, real property, personal property and electric power generation taxes are common sources of state tax revenue that may be imposed on various segments of renewable energy projects. These state taxes can significantly impact the economics of the various parties in renewable energy projects, creating a myriad of tax issues.
A typical investment structure will often have several parties involved.
- Investor – invests cash to fund the project and receives the majority of the tax credit and favorable tax depreciation.
- Installer – obtains the renewable energy components and undertakes and manages the installation of the project.
- Owner – owns the project equipment and sells electric power to the Host.
- Host – the equipment is physically located on the Host’s property and the Host purchases electric power from the Owner.
Each party has numerous considerations to understand when applying each state’s unique rules for each area of state taxation. For example, the Owner needs to determine if sales tax applies to the sale of electricity to the Host and if the renewable energy equipment is subject to real or personal property taxes.
With regard to property taxes, the key determination is whether the state considers the equipment to be real or personal property. An error in this determination could result in the property being taxed twice, once under the business personal property tax and again under the real property tax. Many states and some local jurisdictions provide exemptions, exclusions, abatements and credits for renewable energy property that the parties should also explore.
Sales and use taxes present another complex area for renewable projects. It is important to note that each individual transaction in a renewable project environment can potentially represent a taxable event. Therefore, a detailed analysis is required to determine if and when a transaction may be subject to sales and use taxes. Such analyses should include where and when equipment is transferred as well as investigation of exemptions and exclusions to maximize potential tax savings. Because electricity is typically considered tangible personal property in most states, the sale of electricity may be subject to a state’s sales tax. However, a state may have exemptions that may apply to sales of electricity, although most states are still working through how to apply these rules. Moreover, RECs are a potential new area of taxation for the states and some states may impose sales tax on the RECs. The nature and structure of the transaction is crucial in the determination of whether the RECs may be subject to sales tax.
Documentation is often another overlooked area that could adversely impact the bottom line of a project. It is important to retain documentation such as resale certificates and exemption certificates in order to substantiate all non-taxable transactions. Timely completion of any applications or certifications prior to a project’s commencement is often an issue.
A thorough evaluation of the various state tax incentive programs as well as other state tax considerations such as sales and use and property taxes during the initial planning stages of a renewable energy project is essential to navigate the muddle of state laws. Despite the complexities, taxpayers can realize significant tax savings and minimize unexpected liabilities with proper planning in this area.