President Joe Biden last year signed the Inflation Reduction Act (IRA) that, in addition to a number of other actions, extended and enhanced a number of green energy tax opportunities. Notably, it extended the beginning construction deadline through 2024 for the Production Tax Credit (PTC), for which solar property qualifies. Additionally, it extended the beginning construction deadline through 2025 for the Investment Tax Credit (ITC), and expanded the definition of qualifying property to include energy storage technology. Both credits can be monetized under the new direct pay or transferability rules.
States also seek to incentivize the adoption of renewable energy technologies through numerous tax provisions, a sampling of which is discussed herein.
Green Energy Commitments
A large number of states and the federal government are on record in committing to reduce greenhouse gas emissions. A Biden executive order signed in December, “Catalyzing America’s clean energy economy through federal sustainability,” lays out plans to purchase electricity with no carbon footprint for all operations by 2030. This order, along with individual state goals and programs, has increased U.S. solar and wind production and has state tax implications.
States may impose several taxes on renewable generation companies, including income tax, franchise tax, capital stock tax, gross receipts tax, property taxes, and sales and use taxes. As more companies enter the renewable energy space, they should keep sales tax implications in mind during multiple phases of business—building and maintaining facilities as well as producing, storing, and selling energy.
Facility Buildout Sales Tax Exemptions
Sales tax implications must be considered as more renewable generation facilities are built and maintained. All electrical generation locations need to review the taxability of purchases for buildings buildouts, access roads, step-up transformers, and other switchyard equipment to connect to transmission lines.
Numerous states have either a solar or wind tax exemption, meaning that equipment used for electricity generation by either solar arrays or wind farms is exempt from sales tax. For example, Florida provides an exemption for solar energy systems, and New York provides a sales and use tax exemption for solar modules and panels. Additionally, Washington provides a sales tax exemption for solar energy system machinery and equipment under specific criteria.
Sales Tax and Energy Production
The two largest revenue streams from renewable source electricity are electricity sales and renewable energy certificates (RECs). Electricity is generally treated by states as tangible personal property (TPP) for sales tax purposes and, therefore, may provide for manufacturing exemptions. Texas exempts equipment directly used in manufacturing or processing, and Georgia exempts machinery and equipment that is necessary to the manufacturing of TPP. Pennsylvania exempts purchases in the business of manufacturing electricity—under specific guidelines.
To determine whether or not a manufacturing exemption applies, taxpayers should ask: Is manufacturing defined as the production of TPP? Does TPP include electricity? How narrowly is the manufacturing exemption defined?
The sale of electricity is typically taxable except in states with exemptions. Taxpayers should research if electricity is at retail or for resale. Moreover, sales taxes would likely not be imposed on a REC sale. If sold together in a bundled transaction, taxpayers should establish if the electricity or REC is the true object of the transaction.
Storing and Releasing Energy
Companies with battery storage at their facility should investigate if storing and releasing electricity qualifies for a sales tax production exemption. This also applies to charging electric vehicle batteries. Companies are already building these charging stations, and states have offered exemptions for building and installing electric vehicle charging stations. These companies should determine if they will be buying the electricity for resale, who will own the charging equipment, and whether it will be considered a public utility. As vehicles increasingly rely on electricity, states may begin taxing charging stations at a higher rate.
The state that aligns increased usage of electricity through electric vehicle adoption with increased green energy generation will likely realize a competitive advantage in driving new business and market investment. In order for companies to meet requirements set by states and the federal government, more inducements will likely emerge.
—Jason Wade is a state and local tax director in Grant Thornton LLP’s Atlanta office. Kevin Herzberg is a state and local tax partner in the firm’s Tampa office.