New Rules Will Support Broader Biomass and Biofuel Development
On August 19, 2011, the Internal Revenue Service published new regulations governing the use of tax-exempt bonds to finance solid waste disposal facilities. The regulations broaden the potential use of tax-exempt bonds for solid waste disposal and recycling facilities, including waste-to-energy and biofuels facilities. The final regulations can be found here:
Most significantly, the new regulations:
- Eliminate the "no-value test," which required that solid waste have no value.
- Allow for mixed-input facilities if at least 65% of the feedstock material constitutes solid waste.
Solid Waste Disposal Facilities—The tax code permits the use of tax-exempt bonds in financing solid waste disposal facilities. Under the new regulations, a solid waste disposal facility now includes any facility which (1) processes solid waste in a "qualified solid waste disposal process," (2) performs a "preliminary function" or (3) is functionally related and subordinate to a facility that processes solid waste or performs a preliminary function.
Solid waste is defined as garbage, refuse and other solid material derived from any agricultural, commercial, consumer, governmental or industrial operation or activity if the material is used or residual material and is reasonably expected by the person who generates, purchases or otherwise acquires it to be introduced within a reasonable time into a "qualified solid waste disposal process." Solid waste does not include virgin material, solids within liquids and liquid waste, precious metals, hazardous materials and radioactive material. The new rules clarify that solid waste can include material resulting from governmental activities and that solid waste includes animal waste.
A qualified solid waste disposal process includes (1) a final disposal process, (2) an energy conversion process, consisting of a thermal, chemical or other process that is applied to solid waste to create and capture synthetic gas, heat, hot water, steam or other useful energy, regardless of whether such energy constitutes a first useful product, or (3) a recycling process to reconstitute or transform the solid waste into a useful product, ending with the production of the first useful product.
Elimination of No-Value Test—Under the prior regulations, material having any value did not qualify as solid waste. Thus, if any person was willing to purchase the material at any price, the disposal or processing of that material was not eligible for tax-exempt bond financing. The test made tax-exempt bond financing unavailable when the material had nominal or fluctuating value, or the potential use of the material in a particular process might create a market for the material. The new regulations eliminate the no-value test. Waste-to-energy and biofuels facilities using feedstock with nominal or potential value, but which otherwise qualifies as solid waste, will now be eligible for financing with tax-exempt bonds. This one change significantly broadens the availability of tax-exempt financing to facilities which were not elibigle for this tool under prior regulations.
Mixed-Input Facilities—The final regulations include a mixed-input accounting rule, under which a facility continues to qualify as a solid waste disposal facility so long as 65% of the material introduced into the facility constitutes solid waste. The rule will permit the use of fossil fuel, chemical and other additives not constituting solid waste in connection with the processing of the solid waste. This "fuel use test" is similar to rules which govern certain qualifying facilities certificated by FERC.