Property Tax Post: Arizona’s Taxation of Leased Solar Panels Lights Up Controversy

The Arizona Department of Revenue’s decision to tax leased solar panels has solar energy advocates, solar panel companies and lessees of solar panels in less-than-sunny moods over their new property tax liability. Two solar companies, SolarCity Corp. and Sunrun Inc., filed a lawsuit Monday in the Arizona Tax Court challenging the department’s policy.

Under Arizona law, solar energy devices that are designed primarily for on-site consumption are considered to have no value, and add no value to property on which they are installed, for property tax purposes. However, another statute provides that renewable energy equipment that is used to generate solar power not intended for self consumption is taxable, and is valued based on 20 percent of its depreciated cost. Thus, if the solar panels are used to power the building they are attached to, they are not taxable. But if a solar panel company generates power and distributes it to off-site buildings, those panels are taxable.

For homeowners or other solar panel users, the taxability distinction essentially comes down to whether the panels are owned or leased. If the user purchases solar panels, installs them on the property and then uses the energy produced by those panels at the property, the panels are not taxable. However, if the owner leases the panels from a solar company, and makes payments to the company for the energy produced, the department has indicated that such property is centrally assessed and taxable based on its depreciated cost.

The department classifies the latter as renewable energy equipment, akin to how a power plant generates power and then transmits it to customers. The companies argue that they don’t distribute energy to customers; rather, they only provide leased equipment that allows the customer to produce energy for on-site consumption, notes an article in the Arizona Republic. Again, the distinction revolves around the ownership interest. Because in a lease scenario the company maintains ownership, the department considers the property off-site, even though the solar panels are still producing property at the spot where they are located.

But leases are apparently popular for many customers who can’t afford to purchase expensive solar panels outright, says the Arizona Republic. And the companies indicated that they plan to pass on any increased tax costs from the department’s new policy to lessees, according to a report by ThinkProgress.

The Republic gives an example of how the policy might deter an average homeowner from leasing a solar pane. A $35,000 solar panel would generate approximately $150 in increased property tax liability the first year the panel is in use. With depreciation, the liability would decrease each year after that. While $150 doesn’t sound like a huge tax hit that would prevent people from leasing solar panels, a major problem is that the increased tax liability offsets any savings the panel would provide compared to other energy options. With typical energy savings of $5 to $10 per month on power bills from using a solar panel, a homeowner might be able to save up to $120 a year, and amount that would likely be offset by the associated increased tax liability. Larger, more expensive solar panels used for commercial operations would generate more energy and more savings, but also incur greater property tax liability.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Does this distinction between on- and off-site consumption treat property owners and solar lessees fairly? Do you agree that solar companies that lease panels to customers, who in turn use the panels to generate power for on-site consumption, should be treated like ordinary power plants for tax purposes? From the homeowner’s perspective, should the purchase v. lease distinction be so important?

Sign up for a free trial of the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state property taxes.

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