Background: This summary of Ohio taxes is prepared to explain the Ohio state tax system applicable to members of the wind industry. Wind developers will generate electricity for sale to others. As a result, wind developers may well be classified as “electric companies,” even though they may not qualify as a regulated public utility. Under Ohio tax law, an electric company is any person “engaged in the business of generating, transmitting, or distributing electricity” in Ohio for use by others. Generally, a taxpayer is engaged in the specified activities when it owns the physical facilities necessary to perform those activities. An electric company is a public utility for Ohio tax purposes.
As an electric company for Ohio tax purposes, a wind developer will be subject to the corporation franchise (Revised Code [“R.C.”] Chapter 5733), public utility personal property (R.C. Chapter 5727), real property (R.C. Chapters 5713 and 5715), commercial activity (R.C. Chapter 5751), and sales and use taxes (R.C. Chapters 5739 and 5741). These taxes are discussed in the following pages. We do not believe a developer will be subject to the public utility gross receipts tax (R.C. 5727.30-.38) or the kilowatt-hour tax (R.C. 5727.80-.93) although it may be required to pay that tax on electricity that it purchases and consumes in its operations in Ohio at the regular stations, for example, or the general business property tax (R.C. Chapter 5711). However, to the extent that the scope of the activities of a wind developer changes, it may become subject to one or more additional taxes.
Tax Incentive Programs
There are several tax incentives enacted to support economic development in the State of Ohio. Many, but not all, are tied to some extent to the creation of employment opportunities. We believe incentives for the following are most likely to apply to this project: (i) facilities located in enterprise zones or community reinvestment areas, and (ii) certified pollution control facilities. However, it is possible other incentives may also apply and further discussion should be had regarding this possibility.
Enterprise Zones and Community Reinvestment Areas:
These two programs provide property tax exemptions for new or expanded facilities. Under the Enterprise Zone program, investments and projects creating new jobs in designated zones may qualify for real and tangible personal property exemptions for up to 100% of the value of the investment, for a period up to 15 years. The zone must be established by the appropriate jurisdiction. An enterprise seeking an exemption must file an application to the local authority that administers the zone prior to the commencement of the project. The application must contain (i) an estimate of the number of employment opportunities to be created or preserved by the project; (ii) an estimate of the amount to be invested in new buildings, improvements to existing buildings, machinery, equipment, furniture, fixtures, and inventory; and (iii) a listing of the current investment at the site, if any. Notice of the application must be given to the local school district.
The local jurisdiction must investigate the application. If it finds the enterprise is qualified by financial responsibility and business experience to create and preserve employment opportunities and improve the economic climate in the area, it may enter into an agreement granting an incentive to the applicant. The actual incentive is negotiated by all the parties and is memorialized in a written agreement. Most of the terms of the agreement are imposed by statute. Various conditions and fees may be imposed upon the enterprise and there may be a pay-back provision if the enterprise fails substantially to comply with the agreement. The final agreement must be reached and signed before construction on the project begins. Once the agreement is reached, the jurisdiction that manages the zone must approve legislation to give effect to the agreement and incentives.
The definition of a “facility” that qualifies for enterprise zone incentives contains specific provisions relating to facilities used to generate electricity. While we believe the general definition of a “facility” as a place of business is broad enough to encompass the converter facilities, it is possible that tax authorities could take the position that only generating equipment qualifies for the exemption. In addition, the enterprise zone program is intended to promote economic development through the creation of jobs. As a rule of thumb, a minimum of 25 jobs should be created.
Under the Community Reinvestment Area program, projects constructing or renovating improvements to real property exceeding a minimum investment threshold may qualify for real property tax exemptions for up to 100% of the value of the improvements for periods up to 15 years. Like the enterprise zone program, application is made to the appropriate local authority, notice is given to the local school district, the actual incentive, term, and conditions are negotiated by the parties, and the agreement must be reduced to writing, before construction may begin.
The actual threshold required in order to qualify for an exemption is established by each municipal corporation; however, for commercial and industrial projects, that amount is typically $5,000 in the case of a renovation. There typically is no threshold for new construction. In addition, a municipal corporation may, by ordinance, limit the term of an exemption to less than 15 years.
Certified Pollution Control Facilities:
Ohio law provides for the certification of air, water, and noise pollution control facilities. The facility must be installed primarily for the purpose of pollution control and be reasonably adequate for its purpose, and only those portions used exclusively for pollution control qualify for certification. Both real and tangible personal property may be certified.
Application is made with either the state tax commissioner (air and noise pollution) or with the Ohio Environmental Protection Agency (water pollution). Upon initial determination by the appropriate agency, either the property owner or the county auditor may request administrative and judicial review.
Once a facility is certified, the exemption lasts for the life of the facility and applies to routine repair and maintenance. Certified facilities are exempt from sales and use taxes, real and tangible personal property taxes, and are excluded from consideration under the franchise tax.
Ohio Air Quality Development Authority Bonds:
The Ohio Air Quality Development Authority (“OAQDA”) provides conduit bond financing for portions of projects that promote air quality. The authority meets monthly. An application must be filed with the authority at least three weeks before the monthly meeting at which action is requested. Authority staff will review the application and make a recommendation as to the portion of the project that qualifies for the exemption. Once the resolution is passed by the authority, an inducement letter is signed pursuant to which the authority promises to issue bonds if the project is undertaken. There is no requirement of local approval.
Facilities that are funded by OAQDA bonds are exempt from property taxes for as long as the bonds remain outstanding. In addition, the purchase of tangible personal property and services incorporated into such a facility are also exempt from sales tax.