Let’s Talk About Tax

With a changing planet and generous federal tax incentives, renewable energy projects are increasing in both number and size. So naturally, states want their fair share of tax revenue.

How states tax renewable energy projects, like solar and wind, varies from state to state. And within each state, there are generally multiple tax types at play, such as property tax or sales and use tax. Moreover, because renewable energy projects are relatively new in the grand scheme of commercial energy, states are still shaping their tax structures for such projects.

Property Tax

In general, states apply either a value-based tax, nameplate capacity tax (based on a project’s maximum amount of electrical output), or generation tax on solar and wind projects, often differentiating between the two project types. For example, Iowa permits counties to adopt a special valuation methodology for wind projects resulting in lower assessed values during the first several years of a project. At the same time, Iowa imposes a “replacement” generation tax on solar projects, taxing a project based on how many kilowatts of energy the project produced in a year. Project companies must also consider how states treat the underlying land for property tax purposes. Some states continue to tax the land subject to general ad valorem principles while others exempt project land and consider it part of the project itself.

Sales and Use

Some states provide explicit exemptions from sales and use tax for equipment and other tangible personal property used in a solar or wind project. Others, such as South Dakota, offer reinvestment payments whereby qualifying companies are reimbursed for sales tax payments made on renewable energy projects. Additionally, some states tax construction-related services and others do not.

Finally, the taxation of renewable energy projects is constantly changing. Just last year, Michigan’s legislature passed and presented a law to its governor that would have instituted a nameplate capacity tax on solar projects. However, the governor vetoed that bill only to send it back to the Michigan State Tax Commission for more input.

The takeaways are simple: state taxation of renewable energy projects is not uniform, it is complex, and depending on the state, still evolving.