Below is a summary of state tax developments in 2014 relating to energy tax credits:
Arizona: On May 20, 2014, the State of Arizona Department of Revenue rejected a taxpayer’s ruling request that certain pool covers qualify as passive solar-energy devices within the meaning of A.R.S. §§ 42-5001 and 44-1761.1 The taxpayer had hoped that the pool covers in question would qualify for the credit. The taxpayer noted that the pool covers were designed specifically to retain heat. However, the State of Arizona Department of Revenue cited a U.S. Department of Energy study finding that, on net, pool covers reduce a pool’s heat because they reduce solar energy absorption. Additionally, the State noted that other features of solar energy devices were not included with the pool covers, such as collectors, heat exchangers or storage units, as they are defined under A.R.S. § 44-1761.
On December 11, 2013, which admittedly was a few weeks before 2014, contrary to the green trend in state tax credits, Arizona legislators voted to continue a tax credit that allows utility companies to write off 30 percent of the sales tax they pay on the purchase of coal.2 Most of the power in the state is supplied by Arizona Public Service Co., which operates two coal power plants, with a total capacity of 3,245 megawatts.
Iowa: On October 16, 2014, the Iowa Utilities Board amended Iowa’s renewable energy tax credit statutes to reflect changes that became effective on July 1, 2014, which extend the dates for the tax credit regime by two years. Credits may now be issued for renewable energy sold or used for on-site consumption through December 31, 2026, instead of December 31, 2024. Also, an eligible facility may now be placed in service before January 1, 2017, instead of by January 1, 2015.
Furthermore, as part of the legislative changes, a cogeneration facility incorporated within or associated with an ethanol plant may now receive tax credits for heat and power generation. Also, cogeneration facilities are no longer required to use natural gas, but may now use methane, landfill gas or biogas.
Louisiana: On January 10, 2014, the Louisiana Department of Revenue issued a Revenue Information Bulletin explaining some limitations on the application of the Louisiana Solar Energy Systems Tax Credit, which provides tax credits with respect to the installation of solar-electric and solar-thermal systems for single-family residences.2 First, the bulletin notes that the credit does not apply to costs that are not necessary components of a solar-electrical or solar-thermal system, such as air-conditioning units, heating units and ductwork. Second, the bulletin notes that stand-alone, solar-powered air-conditioning and heating units, which do not service any additional energy needs of a residence, are ineligible for the credit.
Minnesota: Minnesota is another state that bucked the trend of providing tax incentives for solar. It has enacted a tax with respect to solar power systems with a capacity of more than one megawatt. The tax is $1.20 per megawatt hour produced. In mid-October 2014, the Minnesota Department of Revenue issued guidance on the Solar Energy Production Tax. The guidance defines a “solar energy generating system” as “a set of devices whose primary purpose is to produce electricity by means of any combination of collecting, transferring or converting solar generated energy.”3 The capacity of the system can include any capacity built within the same 12-month period that exhibits characteristics of being a single development. Minnesota will use all reasonable factual inferences suggesting that any such systems should be combined for these purposes. A taxpayer should file by January 15 with respect to the preceding year, and the tax must be paid by May 15 to the county treasurer where the systems are located.
New York: On May 23, 2014, the U.S. Internal Revenue Service released a Chief Counsel Advice Memorandum that rejected a taxpayer’s claim that refunds from the New York State Investment Tax Credit should not be considered ordinary income.4 The taxpayer was an individual passive investor with a zero basis in an LLC treated as a partnership. In Year 1, the LLC purchased equipment that qualified for the credit, and the taxpayer claimed the credit on his Year 1 tax return. In Year 2, the taxpayer received a “refund” payment because the credit exceeded his state income tax liability (this was not an actual refund of any amount previously paid by the taxpayer or the LLC). Note: New York State paid the credit directly to the taxpayer, and the LLC did not have a right to receive it.
The taxpayer argued that the credit should not be considered ordinary income under either of two scenarios: (1) the taxpayer should be allowed to offset the refund with the LLC’s losses because the refund creates outside basis in the taxpayer’s interest in the LLC, or (2) the refund is a deemed distribution in excess of basis and therefore subject to capital gains rates. The Internal Revenue Service (IRS) rejected these arguments. The IRS’s rationale was that, since the credit was paid directly to the taxpayer and the LLC had no right to receive it, the credit could not be considered a partnership item, and thus (1) could not affect outside basis and (2) could not be treated as a deemed distribution in excess of basis from the partnership to the taxpayer. It appears that the IRS's analysis was highly formalistic, relying on defined terms in §§ 702 and 731 of the IRC to reject the assertion that the refund was partnership property.
North Carolina: On October 1, 2014, the North Carolina Department of Revenue issued a report titled Guidelines for Determining the Tax Credit for Investing in Renewable Energy Property.5 The document describes both the North Carolina tax credit for investing in renewable energy property and the tax credit for donating to nonprofits and local governmental entities to enable them to acquire renewable energy property. Taxpayers may claim the investment credit for 35 percent of the cost of renewable energy that has been constructed, purchased, or leased and placed into service in North Carolina. Note: this 35 percent credit can be claimed concurrently with the federal tax credit for renewable energy equipment, with both credits being claimed in full against the cost of the equipment without factoring in the savings provided by the other credit. Generally, the North Carolina credit is taken in five equal installments, beginning with the year the property is placed in service. The donation credit equals the proportionate share of the credit that a tax-exempt entity or governmental entity could have claimed for itself. For example, if a donor gives 100 percent of the renewable energy property used, the donor is entitled to 100 percent of the value of the tax credit.
Texas: On September 23, 2014, the Texas Comptroller of Public Accounts called for an end to tax credits for wind energy in Texas.6 In supporting this position, the comptroller noted the cost of the credits, the already existing wind-energy infrastructure in Texas, the lack of reliability of wind energy and the “unfair market advantage” that the subsidies provide. Existing subsidies include property tax incentives under both the Texas Economic Development Act and the Texas Redevelopment and Tax Abatement Act. Critics of the comptroller’s assertions note that the oil, gas and nuclear energy industries have received substantial government subsidies and continue to do so.7
Utah: On April 1, 2014, Utah modified its renewable energy tax credit to include solar projects.8 The changes take effect for the taxable year beginning on or after January 1, 2015. A business entity will be able to claim a tax credit equal to the product of .35 cents and the kilowatt hours of electricity produced and either used or sold during the taxable year. The business entity must own a commercial energy system located in Utah that uses solar equipment capable of producing a total of 660 or more kilowatts of electricity. Alternatively, if the equipment cannot produce a total of 660 or more kilowatts of electricity, a business entity will generally be able to claim a tax credit of up to 10 percent of the reasonable costs of any commercial energy system installed (including installation costs).
Virginia: On April 25, 2014, the Virginia Tax Commissioner rejected a taxpayer’s ruling request that the leasing of photovoltaic panels and related equipment qualify for a Virginia sales and use tax exemption for “gas, electricity, or water when delivered to consumers through mains, lines, or pipes.”9 The Tax Commissioner reasoned that the true object of the transaction was leasing solar equipment, as opposed to the sale of solar electricity to consumers; therefore, the exemption is inapplicable, and the ordinary statute for retail sales and use tax should apply. Note, the Tax Commissioner did find that, under a power purchase agreement, electricity sold to host customers would qualify for the exemption.
The following blog post was published in Power Finance & Risk on December 23, 2014.