A filing with the Arizona Corporation Commission from a top U.S. tax law firm concluded that tariffs proposed as an alternative to net energy metering could complicate residential solar system owners’ federal tax credits and force them to pay income tax for the electricity their systems produce.
The Alliance for Solar Choice (TASC) was forced into the filing as a result of recent proposals to replace net metering in Arizona, explained TASC President Bryan Miller. The group was reluctant to file because the legal opinion will likely “raise very difficult questions” about feed-in tariffs already in place and proposed around the country.
Arizona Public Service, the state’s biggest electricity provider, last month proposed adding a charge to its net energy metering (NEM) program or replacing it with a “bill credit.”
NEM pays rooftop solar owners retail rates for the electricity their systems send to the grid, up to the point of zeroing out their bills. Zeroed bills allow solar owners to escape the bill’s infrastructure charges. This, APS and other utilities argue, shifts the burden of paying for transmission and distribution infrastructure to non-solar owning ratepayers.
Solar advocates claim systems are a net benefit to the grid, and some studies have verified that. Utilities’ studies show solar owners use the grid as much as other ratepayers and should therefore pay their fair share.
In one of the two APS-proposed alternatives, NEM would stay in place but charges would be added to cover infrastructure costs. Numbers in the APS filing with the ACC show proposed charges ranging upward from $40 per month for normal-sized residential systems, easily high enough to compromise rooftop solar’s value proposition.
NEM would be eliminated in the other APS proposal, but the “total rooftop solar generation is exported to the grid and purchased by the utility.” Solar owners would get a “bill credit” for that amount set by regulators. Customers would also pay retail rates for their “total electrical needs served by the utility.”
This buy-all, sell-all arrangement would essentially be a feed-in tariff or value-of-solar tariff. It seems potentially fair. But an opinion from Skadden, Arps, Slate, Meagher & Flom LLP partners Sean Shimamoto and Emily Lam that was included in the TASC filing suggests that such a tariff could result in tax problems for solar owners.
“The payments received by a taxpayer for the sale of electricity under feed-in tariffs appear to fall squarely within the definition of taxable gross income,” wrote Shimamoto and Lam, whose firm ranks among the most respected in tax law.
“The terms of FITs provide for the sale by the taxpayer to the utility of all electricity generated by the taxpayer's residential solar system,” they added in the memorandum filed by TASC. “In exchange, the utility compensates the taxpayer with either cash or a credit on the taxpayer's utility bill. Although the taxpayer may also purchase electricity from the utility, under FITs, the two transactions are separate and distinct. The proceeds from the taxpayer's sale of electricity to the utility therefore likely constitute gross income.”
This conclusion, they added, “is supported by Senate Bill 1225.” The bill specifically excludes "any gain from the sale or exchange to the electrical grid" as taxable income.
“The proposed bill creates a clear negative inference that absent the income exclusion proposed,” the attorneys wrote, “gain from the sale of electricity in this context constitutes gross income.”
Shimamoto and Lam also concluded the APS “bill credit” proposal would put solar owners at risk of losing the 30 percent personal federal investment tax credit (ITC).
The system owner has to use “at least 80 percent of the electricity generated” for nonbusiness purposes to qualify for the personal ITC, the attorneys wrote. “Under FITs, 100 percent of the electricity generated is sold to the utility, and thus 100 percent of the use of the residential solar system is for business use.”
Shimamoto and Lam are correct about the income tax issue, agreed a New York tax attorney familiar with renewables tax issues who asked not to be named. The APS “bill credit” is, at best, “not helpful” to rooftop solar owners and could result in taxation if their systems’ output is high enough.
The source disagreed about the 30 percent ITC being at risk. If sale of the electricity to the utility makes system owners ineligible for the residential ITC, he said, they would then be eligible for the 30 percent business tax credit. And that would make them eligible for the benefits of accelerated depreciation as well, he added.
It is correct that the owner can become eligible for the business ITC, Clean Coalition Executive Director Craig Lewis agreed. But most residential system owners cannot take advantage of accelerated depreciation, he explained, so it essentially becomes straight-line depreciation, “which has the equivalent effect of adding about 10 percent to the installed cost of a solar project.”
The clear takeaway is that the APS proposals create tax-related legal difficulties. “FITs are a solution in search of a problem,” Miller said. “NEM is proven. When something is not broken, you shouldn’t try to fix it.”