Solar City Corporation and Sunrun Inc. (collectively, the “Companies”) filed suit on June 30, 2014 challenging the Arizona Department of Revenue’s (ADOR) position that certain solar systems owned by the Companies (the “Systems”) are subject to property tax. The ADOR’s interpretation of the relevant statutes, if upheld, could result in millions of dollars in property taxes. 1
The property taxes challenged in the complaint, which can be found here, are with respect to leased solar equipment. The Companies pay the upfront costs of the Systems and are responsible for installing and maintaining them at the customers’ properties. The rent that the customers pay for the use of the Systems is less than what they would otherwise pay for electricity – a savings of approximately $30 per month in the case of a three-bedroom home. The lease is essentially a means of financing the cost of the Systems, which enables the customers to make lease payments that are less than what they would otherwise pay to their electric utility companies.
The Companies disagree with the ADOR’s interpretation of two state statutes governing the valuation of solar energy equipment for purposes of property tax assessment. Under A.R.S. § 42-11054(C)(2) (the “Zero Value Rule”), equipment that is “designed for the production of solar energy primarily for on-site consumption” is considered to not have any separate value and to not add any value to the property on which it is installed. Accordingly, property tax is not assessed on the value of such “on-site” solar equipment. Solar systems that do not generate energy primarily for on-site consumption, however, are subject to property tax and, under A.R.S. § 42-14155 (the “20 Percent Value Rule”), are treated as having a value equal to 20 percent of the equipment’s depreciated cost for property tax purposes.
The Companies’ position is that the Systems qualify as equipment that produces energy for on-site consumption and therefore have no value for property tax purposes. The ADOR, however, has interpreted the Zero Value Rule as only applying if the homeowner owns the solar equipment. Where, as is the case here, the homeowner leases the solar equipment from the equipment owner and pays the owner for the power produced. The solar equipment is valued under the 20 Percent Rule.
It will be interesting to hear the court’s views, as the ADOR’s position does not appear to be valid based on the plain language of the Zero-Value Rule. On its face, the statute does not require ownership of the equipment and would seem to apply so long as the equipment produces solar energy that is used at the location at which the equipment is installed. The ADOR, however, claims that on-site consumption means more than that – the energy must be produced for “self-consumption,” which is not the case when the user does not own the equipment. This interpretation was set forth by the ADOR in a 2013 memorandum, which can be found here (the “ADOR Memo”). 2 Thus, the ADOR Memo concludes that the Zero Value Rule does not apply to equipment installed at a customer’s premises if the customer obtains the power either through a lease of the equipment or under a power purchase agreement (PPA).
The ADOR’s position is also difficult to understand as a policy matter. The cost of these taxes will be significant and will ultimately translate to less cost savings on energy for the customer. It is a typical equipment leasing practice to pass through the property tax to the customer. And even if there is no direct pass-through, the Companies are likely to pass on the cost through higher pricing for future Arizona customers. It is also difficult to justify this different property tax treatment of a homeowner who finances the cost of the equipment through a lease arrangement from one who obtains financing under a bank loan.
It remains to be determined whether a positive outcome in this case will also prevent the ADOR from assessing property tax on solar equipment if the customer pays for the power generated by the equipment under a PPA. One of the Companies’ arguments is that they do not “sell” energy to the ultimate users. Depending on the court’s rationale, this could be a distinguishing factor that enables the interpretation in the ADOR Memo to stand with respect to PPAs.
1 See Henry J. Reske, Solar Companies Sue Arizona DOR Over Property Tax Memo, 2014 State Tax Today 128-1 (Jul. 3, 2014).
2 Memorandum of the ADOR, Property Tax Division and Centrally Valued Properties Unit (Apr. 14, 2013).