Interest and investment in large-scale renewable energy and alternative energy projects have increased in the U.S. over the last five years. This 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. To enhance the chances for project success, project design, site selection, and state and local tax planning should be taken into consideration.
Green project owners and investors should begin state and local tax planning during the project scoping and preconstruction phases, focusing on the following:
- Negotiated site selection and incentives
- Property tax liability projections and future property tax compliance needs
- Sales and use tax (SUT) exemption and planning needs for construction period efforts
- Pollution control exemption analyses to further property tax and/or SUT savings
Integrating the review of these tax considerations and benefits can ensure a valid tax profile and a thorough understanding of the project’s potential tax savings. Combined with available federal tax incentives, these state and local tax savings can provide economic enhancements to green projects and may provide 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 tax obligations is an important first step when investigating a major green project’s economic viability 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 that led to a determination of its eligibility for the incentive(s) through administrative compliance efforts. The project team should develop processes and reporting procedures to help ensure that the company can verify commitments made to the community in the incentive agreement related to project spending, job creation, revenue generation or other project performance criteria. Compliance reporting plans should be developed early to develop a compliance reporting calendar and to ensure compliance is tracked and promptly communicated.
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. These specialists 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 where 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 confirm proper values are used in liability calculations.
Challenging excessive assessed values for project property should be considered when there is a disagreement with how an assessor developed the values or when assessing authorities have inadvertently overlooked project depreciation and/or obsolescence attributed to the project. Project tax planners should also consider how property tax bill processing and tax bill payment will be handled. These efforts can ensure project tax needs are met during both construction and operation.
Ensuring green projects have established appropriate assessed values and reporting processes, especially with first-time projects, can be challenging, but the obstacles decrease significantly as the company gains experience. Engaging a proactive, energy-savvy property tax team at the onset of a new project ensures companies pay only the appropriate amount of tax and identifies when appeals are warranted to further reduce tax.
SUT 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 SUT liability.
SUT professionals advising the project should perform a detailed analysis to determine when a transaction may be subject to SUT. 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 contracts are clearly delineated and appropriate. They should also review SUT records periodically during project construction to ensure the appropriate project sales tax payments are occurring. Finally, the team will need to be prepared to advocate for the project with state governments to further minimize their SUT audit exposure.
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. 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.
Conclusion
Kroll’s recent integrated state and local tax successes have relied on 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 and alternative energy clients achieve large-scale tax savings on green projects, we at Kroll know that integrated state and local tax planning works. Contact us today to learn how it can work for you.
