CALIFORNIA voters approved two ballot initiatives on November 6 that will affect tax burdens in the state.
Proposition 30 increased the statewide sales tax rate from 7.25% to 7.5% starting on January 1, 2013.
Proposition 39 will require companies that operate in California as well as other states to determine the amount of income they earn in California for state income tax purposes based on the percentage of sales in the state as a percentage of their total sales. Companies have had the option since January 2011 to apportion income to California based on a single-factor formula — sales — or a three-factor formula — property, payroll and sales. (For most companies, sales are given double weighting in the three-factor formula.) The choice reportedly costs the state $1 billion a year. Companies will now be limited to apportionment based on sales starting January 1, 2013. Half of the $1 billion that Proposition 39 is expected to raise will be used for energy efficiency and clean energy programs like retrofitting schools and government buildings so that they draw less electricity from the grid.
The remaining funds go into the general revenue account of the state. The governor said during the campaign that Proposition 30 was needed to avoid steep additional cuts to spending on schools.
The votes were a watershed. There have been seven previous unsuccessful attempts in California to increase taxes through ballot initiatives since 2004.
US IMPORT DUTIES on Chinese solar cells will be mostly higher, but start later, than expected. Chinese solar cells are subject to both countervailing and anti-dumping duties when imported into the United States. The US Department of Commerce set the final duties in October. The total duties are 23.75% for Trina, 35.97% for Suntech, 30.66% for 59 other Chinese solar cell manufacturers who made filings in the proceedings, and 254.66% for other manufacturers who did not participate. The countervailing duty had been expected to apply to imports on or after December 27, 2011 and the anti-dumping duty to apply to imports starting February 25, 2012, but the government decided to start them roughly three months later. Therefore, countervailing duties will have to be paid on Chinese solar cells imported on or after March 26, 2012 and anti-dumping duties will applied starting May 25, 2012.
The duties are imposed on the importer of record. Under US tariff law, if the manufacturer reimburses its customer for the duty, the reimbursement is itself collected as an additional duty.
Imports of Chinese solar panels fell 77% through July on a year-onyear basis. Imports from Malaysia increased 188%.
Eight members of Congress, including Senator Ron Wyden, the incoming chairman of the Senate Energy Committee, sent the acting Commerce secretary a letter in late September asking her to take steps to prevent Chinese solar panel manufacturer from circumventing the duties by shipping Chinese wafers to other countries to convert into cells that are then returned to China to incorporate into solar panels. The letter said that the cell accounts for only 20% of the value of a typical solar panel.
TREASURY CASH GRANTS for renewable energy projects are subject to audit by the Internal Revenue Service, but the IRS can share little information with the Treasury, the IRS said in an internal memorandum.
The IRS has a “compliance initiative project” under which it will be examining a sampling of renewable energy companies that received grants (also called section 1603 payments). The IRS will be focusing, among other things, on whether a company used the right tax basis for calculating depreciation. The IRS can audit for up to three years after the due date for the tax return on which any excess grant would have had to be reported as income if the agency finds the grant was overpaid. Thus, if a grant was received in 2011, the IRS would normally have until some time in 2014 to audit.
The IRS does not have authority to ask for any grant overpayment back. However, it can insist that a company report any excess grant as income.
The Treasury has six years from when an overpayment is discovered to ask for repayment. It would like the IRS to alert it to any overpayments that are uncovered on audit.
The IRS said it is barred by a Nixon-era statute called the Privacy Act from sharing taxpayer information with the Treasury. Its findings on audit are considered taxpayer information. The agency said in an internal legal memorandum that it can only advise the Treasury if it finds a grant recipient also claimed tax credits or failed to reduce its depreciable basis by one half the grant, since these relate to grant eligibility and compliance with the grant terms and conditions. Other information can be shared only if grant recipients consent to disclosure.
The memo is Internal Legal Memorandum 201237018. The IRS made it public in September.
PARENT GUARANTEES are a benefit to subsidiaries for which the parent company should be paid, and if a fee is not paid, then one should be imputed, the tax section of the New York State Bar Association told the IRS.
The bar association sent the IRS extensive comments on parent guarantees in September. The agency is already studying whether to issue guidance.
The bar association said guidance is “sorely needed” and suggested that it cover not just guarantees, but also other arrangements that enhance the credit of a subsidiary. However, a promise by a parent company to make future capital contributions to the subsidiary should not lead to an imputed fee to the parent.
The imputed fee should be what a third party would charge to provide the same credit support. Some have argued for use of a “yield approach,” where the fee is a function of the savings in borrowing costs to the subsidiary from having the parent guarantee, but the bar association said such an approach should not be “reflexively preferred.”
It recommended against reducing the imputed fee for benefits supposedly conferred on the parent from having a more valuable subsidiary and suggested ignoring arguments that it might be more expensive for a third party to provide a guarantee than for the parent to do so.
SOUTH AFRICA signed project contracts — including power purchase agreements and implementation agreements — for 28 renewable energy projects in early November.
The agreements pave the way for the projects to close on their financing.
The 28 projects represent a total of 1,416 megawatts made up of 18 solar photovoltaic projects, representing 631 megawatts, two concentrated solar power projects, with a combined capacity of 150 megawatts, and eight wind farms, representing 633 megawatts.
The completion of these projects was met with excitement and some relief in the local market. Financial close for the projects had originally been scheduled to occur by last June, but delays caused by the finalization of internal and regulatory approvals by various counterparties had caused concern about the timetable for implementing South Africa’s renewable energy program.
The renewables program — called REFIT — seeks to procure some 20,000 megawatts of renewable energy over the next 20 years. The first phase of the program had originally called for the procurement of 3,725 megawatts, but the National Energy Regulator of South Africa reportedly has approved a near-doubling of that figure. It has also been reported that 1,075 megawatts of the newly-added capacity will be allocated to solar photovoltaic projects while concentrated solar power projects will receive a 400-megawatt allocation.
There are five “bidding rounds” in the first phase staggered from November 4, 2011 to August 13, 2013.
The second bidding round, which is a step behind the 28 first-round projects, named 19 preferred projects amounting to 1,043 megawatts of total capacity. These projects are scheduled to achieve financial close by March 2013
The third round of bidding is scheduled for May 2013.
KUWAIT has launched its first renewable energy project.
Kuwait’s Central Tenders Committee has issued a request for qualification to potential bidders for the engineering, procurement, construction, operation and maintenance of a combined solar and wind project called Shagaya.
The project will be a multi-technology power park consisting of 50 megawatts of concentrated solar power parabolic trough technology equipped with a thermal energy storage system, 10 megawatts of photovoltaic capacity and 10 megawatts of wind capacity.
The project is the first phase of a Shagaya renewable energy master plan. The aim of the first phase is to enable Kuwait to assess the performance of different renewable technologies, including concentrated solar power, photovoltaic and wind, under the local climate conditions and to conduct technical and economic feasibility and cost benefit analyses for large-scale deployment of each technology in Kuwait.
The final target of the renewable energy capacity for the power park under the master plan is 2,000 megawatts to be implemented in two further phases.
The last two phases are expected to be executed under a form of public-private partnership that will be structured at a later stage through dedicated government bodies in Kuwait.
RETROACTIVE TAXES are rarely unconstitutional, according to a report by the Congressional Research Service in late October.
There is a risk, with corporate tax reform looming, that the US Congress will change tax rates and repeal deductions or credits and that it may do so retroactively.
Often, when Congress takes away tax benefits, it does so effective as of the first vote by one of the tax-writing committees in the House or Senate. Tax rate changes are more likely to apply from the start of the year in which the change is enacted.
There are few examples of retroactive taxes being struck down by the US Supreme Court. The tax changes would have to cross a line in the fifth amendment to the US constitution, which guarantees Americans will not be “deprived of ... property ... without due process of the law.”
According to the Congressional Research Service, a retroactive tax is most likely to run afoul of this guarantee if the tax is applied many years in the past. The Supreme Court found fault with an estate tax change that caught transfers occurring up to 12 years in the past, but it has not had trouble with tax law changes that are applied retroactively to the start of the current year or even the year before.
When Congress takes away tax benefits, it usually provides transition relief to let anyone who signed a binding contract committing to an investment based on the benefits see the investment through. However, it is not required to do so. There are also questions this time whether to offer the standard binding contract relief. Some economists on the Joint Committee on Taxation staff question whether it makes sense to let companies keep tax incentives that are being repealed and also benefit from new lower tax rates.
According to the report, the Supreme Court has said the tax laws are “not a promise, and a taxpayer has no vested right” in the US tax code. Therefore, detrimental reliance by a taxpayer on existing law is not enough to protect him from a retroactive change. Lack of notice is also not a constitutional problem, although retroactive enactment of a gift tax in 1924 was struck down because it was a wholly new tax. Taxpayers who made gifts earlier in the year had no reason to suspect that the gifts might subject them to tax. “It does not appear the Court has found any other situations where lack of notice was an issue,” the Congressional Research Service said.
The report is called “Constitutionality of Retroactive Tax Legislation” and was released on October 25, 2012. CRS is the research arm of the Library of Congress. It writes reports on legal and policy issues at the request of members of Congress.
ELECTRICITY is not “tangible personal property,” the Oregon Tax Court said in September.
Companies are taxed in Oregon only on income that is earned in Oregon. Revenue from sales of tangible personal property is treated as earned in the place of delivery. Thus, if the customer is in Oregon, the sales income is earned in Oregon. Other sales are sourced to where most of the income-producing activity occurs.
BC Hydro, through a trading subsidiary called Powerex, sells electricity generated in Canada to wholesale customers in the United States. Some of the electricity is delivered to a delivery point on the Oregon utility grid, but most of that electricity is then wheeled over the grid to customers outside Oregon.
“The trial in this matter was very interesting, primarily because of the testimony of two distinguished physicists regarding the nature of electricity,” the court said, before concluding that “more probably than not,” electricity is not tangible property. Oregon is a member of a multi-state tax compact and uses a uniform statute suggested by the tax compact for apportioning income. It said that only two other states had considered the treatment of electricity under the uniform statute and both — California and Massachusetts — had come to the same conclusion that electricity is not tangible.
Powerex also delivers natural gas to a hub in Oregon. The ultimate users of this gas are outside Oregon. The company conceded that gas is tangible personal property, but argued that the state should adopt an ultimate destination rule by treating the sale as occurring where the gas is ultimately used. The court agreed.
The case is Powerex Corp. v. Department of Revenue. The Oregon Tax Court released its decision on September 17.
THE COMPARABLE SALES METHOD is the best approach to valuing buildings, the US Tax Court said.
The court reconsidered the value of the facade on an historic building in New Orleans that houses the Ritz-Carlton hotel. A real estate partnership bought the building in 1995 and then bought the adjacent building two years later. It paid a total of $11 million for both. In 1997, it donated the façade of the building housing the Ritz-Carlton to a local nonprofit group interested in preserving the appearance of buildings in the downtown historic district. The building was built between 1907 and 1909.
The partnership claimed the façade was worth $7.445 million and claimed a charitable contribution deduction. The IRS cut the deduction to $1.15 million on audit and assessed a 40% penalty for a “gross valuation misstatement.”
The partnership basically lost in the US Tax Court in 2008 (the court set the value of the façade at $1.8 million), but the partnership then persuaded a US appeals court to send the case back to the Tax Court with instructions to reconsider. Upon reconsideration, the Tax Court made a minor adjustment in the value but otherwise stuck to its original decision.
There are three methods to arrive at value: the reproduction cost method, where the question is how much the façade would cost to reproduce, the income method, which looks at the present value of what someone could earn over time from owning the property, and the comparable sales method, which looks at the prices at which similar assets have been sold.
The court said the reproduction cost approach makes no sense when valuing historic properties, unless someone can show that it would make business sense to replicate the original façade were the building to burn down, since the cost to reproduce an ancient structure using materials and workmanship that are no longer available bears little relation to the economic value today. It said the income approach is too prone to error and to wide swings in value given the large number of assumptions that must be made and, while it is not hostile to the income method, the method is “not favored” if comparable sales data is available.
Turning to the comparable sales method, the court said it would look only at local comparables, given how important location is to valuing particular buildings.
Properties are valued based on their highest and best use. A significant part of the opinion is a discussion about what that use is.
The case is Whitehouse Hotel Limited Partnership v. Commissioner. The court released its decision in late October.
A PROPERTY TAX BREAK for renewable energy producers in Tennessee is “of doubtful constitutionality,” the state attorney general said in a formal legal opinion in early November.
A state law requires that pollution control equipment be valued at no more than 0.5% of its original cost. In 2010, the state legislature extended the same policy to machinery and equipment used to generate electricity in certified green energy production facilities.
The attorney general said the state constitution requires all property in the state to be taxed in an equal and uniform manner.
The new law will remain on the books unless struck down by a court or changed by the legislature. The head of the state agency responsible for overseeing property tax assessments asked for the opinion. The attorney general said the same thing about the cap on property tax assessments for pollution control equipment 24 years ago.
The state legislature debated repealing the law earlier this year, but backed off after solar companies objected. Repeal may be considered again in 2013.
INTEREST DEDUCTIONS may be hard to carry back.
The US tax laws allow net operating losses to be carried back two years and forward for 20 years until they are used. A company carrying back losses can get a refund from the US Treasury.
Congress took steps in 1989 to prevent corporations from engaging in leveraged buyout transactions and then carrying back the interest deductions on debt borrowed to finance the buyouts. It did not want the Treasury helping to fund the buyouts. However, the restriction was drafted more broadly.
Twenty-three years later, the IRS issued proposed regulations in September to explain when interest deductions cannot be carried back.
The restriction is in section 172(b)(1) and (h) of the US tax code.
It will apply to any corporation that acquired at least 50% of another corporation during a year, had at least 50% of its shares acquired or made unusually large cash distributions to shareholders during the course of the year. Cash distributions are unusually large if they are at least 10% of the market value of the corporation’s stock at the start of the year or, if greater, 150% of the average annual cash distributions the corporation made to shareholders during the three prior tax years.
The IRS said it will not try to trace the debt used to fund the stock purchase or cash distributions, but rather will block any carryback of the extra interest expense the corporation is claiming above the average interest expense it claimed during the three prior years. The restriction also applies to the extra interest expense in each of the next two years after the stock purchase or cash distributions.
The new rules come with two acronyms. A “CERT” is a transaction that brings the rules into play. It stands for “corporate equity reduction transaction.” A “CERIL” is the interest deductions that cannot be carried back. It stands for “corporate equity reduction interest loss.”
MINOR MEMOS. The federal Consumer Leasing Act has a lot to say about what can and cannot be in contracts with homeowners. A homeowner leasing a rooftop solar system can only be offered a fixed-price purchase option. An option at fair market value determined at time of purchase is not allowed until such time as there is the equivalent of the “blue book” for used cars for looking up used panel prices ... Efforts were made in 19 states in 2012 to roll back renewable portfolio standards that require utilities to deliver at least a minimum percentage of their electricity from renewable energy. Three states diluted their laws. None of the other efforts succeeded. Ohio allowed combined heat and power facilities to qualify as renewable energy. New Hampshire and Virginia allowed research and development to meet 20% of their targets. Efforts to allow hydroelectricity to count as renewable energy in various states failed. Voters in Michigan rejected a ballot initiative that would have written a higher target into the state constitution ... Bernstein Research estimates that the transition in the United States from incandescent to halogen, fluorescent and LED light bulbs that consume 25% to 75% less electricity will reduce US electricity demand by as much as 3.3%, wiping out three years of load growth. The US is moving to the other bulbs over the period 2012 through 2015 ... Fortune 500 companies reported $187.5 billion in reserves on 2011 financial statements for uncertain tax positions that risk being reversed by the IRS, down from $200 billion the year before. The top five tax reserves were reported by Pfizer ($7.309 billion), J.P. Morgan ($7.189 billion), Microsoft ($6.935 billion), General Electric ($6.384 billion) and AT&T ($5.853 billion).