Arizona has enacted Arizona House Bill 2670 (adding Arizona Revised Statute 41-1520 and amending Arizona Revised Statutes 42-5063, 42-5159, 42-6012, 43-1083.04 and 43-1164.05), which includes taxpayer-friendly revisions to the state’s tax credit for investment in renewable energy facilities used for self-consumption (with such revisions now including defining “self-consumption” very broadly, as described below).
First, taxpayers may now claim a total of $25 million of tax credits per renewable energy facility instead of $5 million. Previously, a taxpayer could receive a $1 million credit annually for each of the first five years a given renewable energy facility was operational. The $1 million annual limit has been lifted to $5 million. The five-year limit remains.
Second, the credit had previously been applicable only for taxpayers using their renewable energy production in furtherance of supporting the taxpayer’s manufacturing facility, but it is now also applicable for taxpayers using such energy for the purpose of supporting the taxpayer’s “International Operations Center.” An International Operations Center is defined as a facility “that self-consumes renewable energy from a qualified [Arizona renewable energy] facility” and invests $1.25 billion in new capital assets (including costs of land, buildings and equipment) within 10 years, with a minimum of $100 million being spent annually (investments greater than $100 million in any year can be carried forward to make up for any shortfalls in future years). A certification must be obtained from the Arizona Commerce Authority to validate that an investment is on track for these thresholds and that the property thus qualifies as an International Operations Center.
Third, with respect to International Operations Centers, self-consumption is very broadly defined to include power transferred to a utility “if the utility is the same utility that provides power to the owner’s International Operations Center in [Arizona].” Therefore, for an International Operations Center, net metering is permitted, and the center does not actually have to use any of the electricity generated at its site. With respect to manufacturing facilities, “self-consumption” continues to include power transferred to a utility if at least 90 percent of the power is “transferred back for self-consumption in [Arizona].”
Key considerations that taxpayers should keep in mind when planning to claim these credits include the following three concepts.
First, timing is critical. Arizona will issue only $10 million of these credits per year, on a first-come, first-served basis. This cap has not been increased, even though an individual facility may now qualify for $5 million of credits annually. Taxpayers interested in claiming these credits should apply for them immediately, because two taxpayers each claiming the maximum would exhaust the available mandate.
Furthermore, with respect to timing, if an International Operations Center is used, by December 31, 2018, a taxpayer must invest at least $100 million in a renewable energy facility in Arizona. This $100 million is in addition to the above-mentioned capital spending requirements on the International Operations Center—meaning that a total outlay of at least $1.35 billion will be required to avoid having the credits clawed back. For manufacturing operations, the rule continues to be that $300 million must be spent on Arizona renewable energy facilities by December 31, 2017, for a taxpayer to be eligible for the credits.
Second, the credits can be clawed back if it turns out that the capital expenditure requirements are ultimately not met. For example, if $1.25 billion is not spent on an International Operations Center within 10 years after its certification, the taxpayer will need to reimburse all credits used (potentially $25 million) to the state of Arizona. Exemption from reimbursement may be granted only under circumstances of extraordinary hardship outside of a taxpayer’s control.
Third, the taxpayer is explicitly permitted to lease an International Operations Center to another party and still be eligible to claim the credits, and it may also be able to lease the associated renewable energy facility as well (with respect to the renewable energy facility, the applicable statutes appear to stipulate only that the taxpayer must “invest” in the facility, without prohibiting the leasing of such a facility). This creates a significant tax credit opportunity for a financial institution with Arizona tax liability that is interested in making a passive investment in an International Operations Center and an associated renewable energy facility.