Sales Tax Slice: Can Tax Policy Curb Tariff Consequences?

solar farm

Last week’s presidential proclamation imposing a 30 percent tariff on imported solar cells and modules is scheduled to take effect on Feb. 7. The tariff, designed to safeguard domestic production from overseas competition found to be “artificially low-priced” by the U.S. International Trade Commission, has raised concerns about its potentially harmful effect on the burgeoning renewable energy market. Though not to be mistaken for a sales tax, this case highlights an interesting dynamic between the two.

Surprisingly, few jobs in the U.S. solar industry involve manufacturing. Of those that do, most produce solar equipment other than cells and modules, such as mounting systems and high-tech inverters, according to the Solar Energy Industries Association. The bulk of U.S. operations focus instead on installing panels and developing “large-scale ‘solar farms,’” as The Sacramento Bee explains. In fact, 80 percent of domestic solar companies reportedly rely on imported solar panels in their business operations—indicating how strongly an increase in price due to the tariff could reverberate throughout the supply chain.

While higher-priced component parts are feared to sink years of effort to grow the industry, both supporters and opponents of the tariff are likely in favor of welcoming new entrants to the manufacturing market, where they can avail themselves of existing sales tax policy on solar energy.

Many states already have exemptions for solar energy equipment in place, as previously discussed by Bloomberg Tax’s Rene Blocker and Ernst Hunter. These range from exemptions for the sale and installation of solar home devices to utility-scale machinery and equipment used to generate solar energy for sale through the power grid.

A more recent addition is California’s partial manufacturing exemption expansion. Previously, the definition of “qualified person” was limited to those primarily engaged in the business of manufacturing; research and development in biotechnology; or research and development in the physical, engineering, and life sciences. Effective last month, it now includes those primarily engaged in the generation and production, or storage and distribution, of electric power. Businesses classified under the Solar Electric Power Generation code are specifically enumerated as qualifying parties, and are eligible for the 3.3125 percent reduced rate.

California’s partial exemption also applies to manufacturers who use solar energy to power their operations. A “qualified person” (using the same definition) who purchases solar panels and solar power equipment for use primarily in running manufacturing equipment generally qualifies for the reduced rate.

Though 29 states currently offer some form of sales tax exemption for renewable energy, it would not be surprising to see even more movement on this issue from states this legislative session as a result of this tariff.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does your state offer exemptions for solar energy?

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