Sales tax implications in green energy

Analyzing tax exemptions for renewable energy producers

Increased renewable energy production and storage is necessary to achieve announced greenhouse gas emission reduction goals. To this end, tax credits and federal and state incentives are increasing the production of green assets, most recently from the Inflation Reduction Act signed by President Joe Biden Aug. 16.

In a recent issue of Tax Notes State, Grant Thornton’s Jason Wade, state and local tax director, and Kevin Herzberg, national indirect tax practice leader, shared their perspectives on sales and use tax issues for renewable generation facilities, energy storage and electric vehicle charging stations.

Federal and state commitments to green energy

States and the federal government have stated goals to reduce greenhouse gas emissions. Biden signed an executive order in December, “Catalyzing America’s clean energy economy through federal sustainability,” which lays out plans to purchase electricity with no carbon footprint for all operations by 2030. The order, along with individual state goals and programs, have increased U.S. solar and wind production. This increase in renewable generating companies will have 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,” Wade and Herzberg wrote.

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 and producing energy.

Sales tax exemptions during facility buildout

Sales tax implications must be considered as more renewable generation facilities are built and maintained.

“All electrical generation facilities should review the taxability of purchases for the buildout of the buildings, access roads, step-up transformers and other switchyard equipment to connect the facility to transmission lines,” they wrote.

Many states have either a solar or wind exemption, which provides that equipment used for electricity generation by either solar or wind be exempt from sales tax. Florida, for example, provides an exemption for solar energy systems, and New York provides a specific sales and use tax exemption for solar modules and panels. Washington also provides a sales tax exemption for solar energy system machinery and equipment under specific criteria.

States generally treat electricity as tangible personal property for sales tax purposes and thus may provide for manufacturing exemptions. Texas exempts equipment directly used in manufacturing or processing, and Georgia exempts machinery and equipment that is necessary or integral to the manufacturing of tangible personal property (TPP). In Pennsylvania, purchases in the business of manufacturing electricity are exempt under specific guidelines for what the electricity production activities must entail.

Some questions taxpayers should ask to determine whether or not a manufacturing exemption applies include: Is manufacturing defined as the production of TPP? Does TPP include electricity? How narrowly is the manufacturing exemption defined?

Sales tax and energy production

The two largest revenue streams from producing electricity through renewable sources are electricity sales and renewable energy certificates (REC).

The sale of electricity is typically taxable except in states with exemptions. An exemption taxpayers should examine is whether electricity is at retail or for resale. For example, Pennsylvania and Texas exempt electricity sales from sales tax if it is used during the manufacturing process, and Pennsylvania exempts sales tax if electricity is purchased for residential use. Additionally, sales taxes would likely not be imposed on a REC sale. If sold together in a bundled transaction, taxpayers should determine whether the electricity or REC is the true object of the transaction.

Storing and releasing energy

Taxpayers with battery storage at their facility should determine whether storing and releasing electricity could qualify for a production exemption from sales tax. This also applies for charging electric vehicle batteries. Companies are already in the process of building these charging stations, and states have likewise provided certain exemptions for building and installing electric vehicle charging stations. These companies should consider questions such as whether they will be buying the electricity for resale, who will own the charging equipment, and whether it will be considered a public utility. As more vehicles rely on electricity, states may also begin taxing charging stations at a higher rate.

“The state that aligns its inducements to the publicly stated goals for increased usage of electricity through electric vehicle adoption and increased green energy generation with the environmental, social and governance initiative will likely have a competitive advantage to drive new business and market investment,” Wade and Herzberg wrote.

In order for companies to meet requirements set by states and the federal government, more inducements will likely emerge.

For more on these topics, read the full article, “Green energy generation, storage and usage: sales tax issues.”