Over the last 18 months, large-scale renewable energy and green energy projects have increased in the U.S., and that growth will likely be the norm over the next decade as economic incentives such as federal and state tax credits continue to spur investment and improve the economic feasibly of these projects. As with any large-scale investment, embarking on a new green energy construction project is ultimately an economic decision to make. To prove successful, considerations should be made regarding state and local tax planning, project design and site selection. An integrated approach to these three facets will ensure tax benefits are maximized, liabilities are correctly anticipated and minimized and ongoing compliance is adequately addressed.
Considering the major capital outlay and the potential tax benefits of green projects, owners and investors should begin state and local tax planning during the project scoping and pre-construction phases, focusing on the following areas:
- Negotiated site selection and incentives considerations for an increased tax benefit,
- Property tax due diligence related to statutory tax liability estimates and future compliance needs,
- Pollution control exemption analysis to further property tax savings and
- Sales and use tax exemption and planning needs for construction period efforts
An integrated review of these tax considerations and benefits can ensure a valid tax profile and a thorough understanding of the potential project tax savings. Combined with available federal tax incentives, these state and local tax savings can provide lifecycle economic enhancements to current green projects and be a template for decision-making on future projects.
Incentives Negotiation and Compliance
Negotiated incentives in the form of property tax, sales tax and other tax abatements or reductions can provide significant project economic benefits. Understanding the company’s obligations is an important first step when investigating a major green project’s feasibility, viability and economic potential for the company and the communities who compete to host such a project.
Once a contract is awarded, it is imperative to maintain the factors or status that led to a determination of its eligibility for the incentive(s) through administrative compliance efforts. Processes and reporting procedures help ensure that the company can verify commitments made to the community in the incentive’s agreement related to project spending, job creation, revenue generation or other project performance criteria. The team tasked with compliance reporting should start early to develop a compliance reporting calendar and plan to ensure compliance is tracked and timely communicated. This foundation will solidify a positive long-term relationship with the community envisioned in the incentive agreement accompanying the project’s success.
Property Tax Planning and Compliance
Property taxes can represent one of the largest, if not the largest, operating costs for a project. Internal or external tax professionals should include property tax experts with direct green energy project experience who can analyze, model and integrate property taxes with other tax benefits and provide liability projections for green projects from the outset of project planning.
Property tax planning teams should take steps to ensure: (1) property tax reporting for a project reflects accurate property classification of real and personal property for the jurisdiction in which the project is located; (2) all specially-taxed property or exempt property is identified and excluded from reporting once certified; and (3) the assessor’s fair market values for both taxable real and personal property are scrutinized to ensure proper values are utilized in liability calculations.
Excessive assessed values for project property should be challenged when there is a disagreement with how the assessor has developed their values, or when assessing authorities have inadvertently overlooked project depreciation and/or obsolescence attributed to the project.
During the planning process, project tax planners should also consider how property tax bill processing and tax bill payment will be handled. While these concerted efforts represent significant administrative effort and cost, they will ensure the project complies with reporting requirements during both construction and operation.
Although ensuring green projects have established appropriate assessed values and reporting processes may be challenging, especially with first-time projects, these challenges decrease significantly over time as the company gains experience. Engaging a proactive, energy-savvy property tax team at the onset of a new project can effectively ensure the company is paying the appropriate tax and justify when appeals are warranted to further reduce tax.
Pollution Control Exemption Analysis for Property Tax Savings
A unique benefit of green energy projects is that several states provide property tax exemption or special tax treatment for project pollution control equipment. Engineers and appraisal professionals with project process knowledge should review design and systems plans to guarantee that eligible environmental systems and equipment are identified and certified to receive available property tax exemptions as pollution control equipment. Certification will typically require three considerations: in-depth technical descriptions of the subject equipment, the environmental regulatory requirement justifying the equipment or system’s installation and, often, the installed cost of the subject pollution control equipment. Each state or jurisdiction will typically have application templates for use in certifying air and water pollution control installations. Certification efforts should be started as early as possible, as governmental certifying authorities may take months to complete their review and certification.
Sales and Use Tax Planning and Compliance
Another crucial consideration when embarking on a green project is researching and understanding statutory obligations and preparing a tax plan around the projected liability that reduces sales and use tax liability.
Sales and use tax professionals advising the project should perform a detailed analysis to determine if, and when, a transaction may be subject to sales and use taxes. This will be especially critical during the project’s construction period and can continue into project operations. Statutes will guide whether equipment or services for the project are taxable. A matrix of taxability can be an effective aid when considering the taxability of a project.
Sales tax team members will need to leverage their experience to maximize exemptions where appropriate and to ensure sales tax obligations in engineering, procurement, and construction (EPC) contracts are clearly delineated and appropriate. They should also perform sales and use tax reviews periodically during project construction to assure that the appropriate project sales tax payments are occurring. Finally, the team will also need to be prepared to advocate for the project with state governments to further minimize their sales and use tax audit exposure.
Duff & Phelps’ recent integrated state and local tax successes have relied upon the technical tax expertise of our team, the history and magnitude of our site selection experience and our strong jurisdiction- and environmental-specific regulatory relationships.
Having successfully helped our renewable energy clients achieve large-scale, green project tax savings, we at Duff & Phelps know that integrated state and local tax planning works. Contact us today to learn how it can work for you.