BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: ABx1 15 HEARING: 5/18/11
AUTHOR: Hill FISCAL: Yes
VERSION: 3/22/11 TAX LEVY: No
CONSULTANT: Grinnell
SOLAR ENERGY PROPERTY TAX EXCLUSION
States legislative intent that the solar energy property
tax exclusion applies to sale-leaseback transactions.
Background and Existing Law
I. Property Taxes . Section One of Article XIII of the
California Constitution provides that all property is
taxable unless explicitly exempted by the Constitution or
federal law. The Constitution limits the maximum amount of
any ad valorem tax on real property at 1% of full cash
value, plus any locally-authorized bonded indebtedness.
Assessors reappraise property whenever it is purchased,
newly constructed, or when ownership changes. The
Constitution and statute define those terms.
Section Two of Article XIIIA allows the Legislature to
exclude from the definition of "new construction," the
construction or addition of any active solar energy system
(Proposition 7, 1980). Through various bills, the
Legislature enacted the exclusion from 1980-81 to 1993-94,
allowed it to sunset from 1994-95 to 1998-99, and
reinstated it in 1998 (AB 1755, Keeley, 1998). The
Legislature has extended it twice in the last decade, most
recently until 2015-16 (AB 1451, Leno, 2008).
The Constitution allows an exclusion from "new
construction" for solar energy systems, but not an
exclusion from "change of ownership." Under the new
construction exclusion, assessors neither reassess the
property when a taxpayer adds a solar energy system to his
or her property, nor include the value of the solar energy
system when a taxpayer buys a new home with a solar energy
system attached so long as the builder of the home didn't
claim the exemption. Additionally, the exclusion
terminates if the property is sold to a new owner. The
AB 15x -- 3/22/11 -- Page 2
exclusion applies to the solar energy system regardless of
who owns it, applying equally to both homeowners who
install solar energy systems as part of their homes, or for
businesses who generate solar energy for sale to investor
owned or municipal utilities.
II. Federal Renewable Energy Tax Credits . Federal law
allows two significant income tax credits for taxpayers
that place renewable energy projects into service.
The renewable energy production credit equal to 2.1
cents per kilowatt-hour produced as of 2008. A
taxpayer may generally claim a credit during the
10-year period commencing with the date the qualified
facility is placed in service. The credit is reduced
for grants, tax-exempt bonds, subsidized energy
financing, and other credits.
The renewable energy investment credit, equal to
30% of total expenditures on each project made in the
taxable year. Eligible solar energy property includes
equipment that uses solar energy to generate
electricity, to heat or cool a structure, or to
provide solar process heat.
In March, 2009, Congress enacted the American Recovery and
Reinvestment Act (ARRA), which allows taxpayers that place
a solar energy facility in service after Dec 31, 2008 to
choose between the production and the investment credit.
Taxpayers cannot claim both credits for the same facility.
ARRA also allowed these taxpayers to receive a cash grant
from the U.S. Treasury Department instead of either tax
credit for systems where construction begins prior to
December 31, 2011. ARRA also excluded the grant from
producers' income for federal tax purposes. California
conformed to the exclusion for state income taxes (SB 401,
Wolk, 2010).
III. Sale-Leaseback Transactions . Several solar energy
firms have developed sophisticated financing transactions
to make solar energy systems more affordable. The sponsor
of this bill, SunEdison structures deals to help financing
entities comply with state and federal tax incentives,
property owners to avoid reassessment, and to make solar
power more affordable compared to buying electricity from
the grid.
While other firms structure transactions differently,
AB 15x -- 3/22/11 -- Page 3
according to SunEdison, its transaction works as follows:
1. Sun Edison assesses a property owner's energy
demand and the solar production capability of the
property.
2. If a property owner decides to install solar, Sun
Edison designs a solar energy system accordingly, and
handles all development work required to construct,
certify, operate and maintain the system at no cost to
the property owner. Sun Edison procures all necessary
permits and rebates relating to the system.
3. The property owner must contract with SunEdison for
the power generated by the system. The power is
provided at a predictable cost, typically over a
20-year period.
4. After certification, SunEdison sells the system to
a third party buyer. The buyer claims the federal
renewable income tax credits and depreciation as the
system owner. SunEdison insures the third-party
against any property tax liability.
5. The property owner, who never owns the solar
system, relies on Section 73 to avoid a reassessment
of its property.
6. SunEdison leases the system back from the buyer and
agrees to maintain and operate the system.
7. As the operator, SunEdison sells the electricity to
the property owner pursuant to a power purchase
agreement. SunEdison can also sell unused electricity
(if applicable) back to a utility through
"net-metering," pursuant to an interconnection
agreement between Sun Edison and the utility.
8. SunEdison maintains an option to purchase the
system from the buyer that if exercised triggers a
property reassessment.
SunEdison states that existing law doesn't clearly address
the transaction detailed above for purposes of the
exclusion, because the financing entity ends up owning the
solar system installed on someone else's property. The
firm wants the Legislature to clarify the law to ensure
that the exclusion applies.
Proposed Law
Assembly Bill 15x makes legislative findings and
AB 15x -- 3/22/11 -- Page 4
declarations that:
The Legislature enacted the exclusion from new
construction for active solar energy systems to
encourage and provide incentives to develop the
systems.
In 2008, the Legislature amended the exclusion to
apply to a taxpayer purchasing a new building with an
active solar energy system when the owner/builder did
not intend to use or occupy the building.
Newly constructed active solar energy systems are
often sold in sale-leaseback transactions or other
transactions for purchasers who may be eligible for
federal tax benefits.
The purchaser of the active solar energy system in
a sale - leaseback transaction receives the exclusion
as long as the active solar energy system is newly
constructed or added and another taxpayer has not
received the exclusion.
That newly constructed active solar energy systems
constructed as freestanding or parking lot canopies,
or constructed as installations on existing buildings
qualify for the exclusion, including those sold in
sale-leaseback transactions.
The provisions of the bill do not constitute a
change in, but are instead declaratory of existing
law.
AB 15x amends the exclusion from new construction for
active solar energy systems in the following ways:
Changes the definition of "active solar energy
system" to specify that the exclusion commences upon
completion of the system on part of a new property or
on an existing building.
States that an active solar energy exclusion that
qualifies before the current sunset date of January 1,
2018 shall also be excluded after that date.
Clarifies that the exclusion remains in effect only
until there is a subsequent change in ownership.
State Revenue Impact
No estimate. County assessors indicate that the measure
would not change the manner in which they currently assess
solar projects.
AB 15x -- 3/22/11 -- Page 5
Comments
1. Purpose of the bill . According to the Author, "AB 15x
clarifies the Legislatures' intent regarding the current
exclusion from property tax reassessment for purchases of
new 'active solar energy systems' that are sold in first
owner sale-leaseback arrangements. With the passage of
Proposition 7 in November of 1980 and the implementing
state statute contained in Revenue and Taxation Code 73,
California has established a limited tax benefit for the
purchasers of new "active solar energy systems" by
excluding the value of a solar energy system improvement on
real property from reassessment under certain
circumstances. Under Proposition 7 and Section 73, the
property owner where the new solar energy system is
installed is not penalized for installation of a solar
energy system that will provide power to them because his
or her property is not reassessed to increase its assessed
value to take into account the value of the active solar
energy system. This exclusion benefits only the property
owner that purchases the solar energy system. When the
property owner later sells his or her property with the
solar installation, the property may be reassessed at that
time to reflect the new value, including the increased
value from the active solar energy system.
This bill is necessary because there is uncertainty in
Revenue and Taxation Code 73 as it relates to the current
exclusion from property tax reassessment for purchases of
new "active solar energy systems" that are sold in first
owner sale-leaseback arrangements. Even though
sale-leaseback arrangements on solar energy systems have
been utilizing the property tax exclusion for years under
existing law, some have argued that there might be
ambiguity in the law and it should be clarified. AB 15x
provides this clarity and reaffirms existing law so solar
projects can continue to receive the tax assessment
exclusion.
As a result of this uncertainty, a company in my district
-- SunEdison -- has unexpectedly had to reserve millions of
dollars on its balance sheet related to California solar
transactions. More importantly, the company has frozen new
solar project development in California after planning on
investing up to $1.2 billion dollars in new projects in the
AB 15x -- 3/22/11 -- Page 6
coming few years. The company is the co-market leader in
California and we need them to continue to invest in
California solar to meet our RPS standards. The accounting
issue my bill addresses is technical, but BOE members and
staff agree that the Legislature must act to address the
accounting problem because they cannot take an action that
will remedy the accounting issue.
Please note, twenty-five county assessors and the BOE have
reviewed SunEdison transactions under Section 73 over the
past decade and never raised a question about their
compliance with Section 73. None are raising questions now
either. Indeed, BOE Members Horton and Yee are in support
of this bill and I am not aware of any BOE or assessor
opposition. This bill, by establishing what is already
existing practice under Section 73, will resolve this issue
and bring SunEdison back into the California solar market
and will also prevent other companies from experiencing the
same problem in the future. This is critical to the
thousands of solar projects and companies in the state who
need certainty as they decide to grow their businesses and
create jobs. I introduced this bill in the special session
with an urgency clause to ensure that California can
continue to retain and recruit thousands of green-jobs
related to solar installation and maintenance which will
benefit the economy and help address the state's budget
deficit."
2. One is the loneliest number . AB 15x provides
legislative blessing for the active solar energy exclusion
to apply to complex financing mechanisms known as
"sale-leasebacks," and makes conforming changes to the
statutory exclusion. The mechanism makes economic sense
for everyone involved: the property owner receives
low-cost, predicable electricity with little to no up-front
cost, and the third-party financier uses federal tax
benefits to reduce unrelated income on their federal taxes,
thereby providing a significant tax incentive to risk
lending its capital to Sun Edison to construct the project.
Sun Edison runs a profitable business, employing
Californians to build and service projects in the state
that provide environmentally beneficial solar energy
systems at a lower cost than they could without using
sale-leasebacks. Thirty years ago, when the voters enacted
Proposition 8, and the Legislature implemented it, the
policy infrastructure didn't consider sale-leasebacks, and
AB 15x -- 3/22/11 -- Page 7
the current state of law has caused sufficient uncertainty
for Sun Edison to seek the legislative change AB 15x makes.
However, AB 15x is sponsored by one firm whose
interpretation of existing law requires disclosing an
uncertain tax position under federal accounting rules.
Firms in the same line of business haven't expressed the
same uncertainty, and assessors haven't differentiated
systems constructed under a sales-lease back from others
for purposes of the exclusion, and don't plan to. The
Committee may wish to consider whether action is necessary
to assuage the concerns of one company.
3. Let the sun shine in . Typically, the exclusion from
new construction for active solar energy systems applies
when a homeowner puts solar panels on the roof, or when a
solar energy production company builds a solar farm. The
exclusion ensures that installing solar energy systems
doesn't trigger a reassessment for the taxpayer so that he
or she doesn't have a big property tax increase as a result
of installation, and lowers the cost for solar producers to
make electricity without causing the pollution created by
its fossil-fuel competitors. Although the sale-leaseback
financing mechanism is undoubtedly complex, and the
beneficiaries of the exclusion harder to distinguish, AB
15x is consistent with the existing exclusion by ensuring
that the same technology isn't treated differently for tax
purposes despite being owned by a financing entity.
Because SunEdison insures the financing entity against the
property tax increase, any change in treatment however
impossible would result in SunEdison footing the bill.
4. A little ain't enough . Solar energy provides
significant benefits both to the environment and the
economy. Solar energy is pollution-free, so investments
made to generate solar energy mean that less energy from
fossil fuel sources is necessary, thereby reducing exposure
to greenhouse gasses and criteria pollutants. Solar energy
helps electricity grid reliability and assuages electricity
prices during periods of peak demand because it is most
plentiful when temperatures are highest, especially when
it's located next to areas of high energy demand.
Additionally, according to Alternative Energy Technologies,
LLC, the solar energy industry represents a sector for
growth in potential skilled and unskilled jobs.
Recognizing the benefits of solar power, California and the
federal government offer numerous incentives for
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individuals to install solar energy systems, including
California Solar Initiative rebates, net-metering (where
ratepayers sell excess solar electricity back into the grid
and pay bills based on net energy usage), accelerated
depreciation for commercial purposes in federal law,
low-interest loans for solar panels on low-income housing,
renewable energy credit sales, and time-of-use electricity
pricing in addition to the property tax exclusion.
5. Tell me about it . A "sale/leaseback" or "sale and
leaseback" is a transaction in which the owner of a
property sells an asset, typically real estate, and then
leases it back from the buyer. In this way the transaction
functions as a loan, with payments taking the form of rent.
Due to the lack of financing available in today's market,
many American businesses are increasingly turning to
sale-and-leasebacks to provide quick capital. In some
arrangements, the current lessee will give the option to
buy the asset back at the end of the lease. Typically, if
the original owner were to buy back the asset, it would
take place at the end of the tax year, in case any party
were to be audited by the IRS. Sale/Leaseback transactions
are considered "reportable" transactions under the state
and federal abusive tax shelter laws. Whenever taxpayers
enter into these transactions, they must file a Form 8886
with both the IRS and the FTB to ensure that the
transaction does in fact have economic substance.
SunEdison applies this tax-advantaged sale-leaseback model
to finance solar production in California, which created
sufficient uncertainty regarding whether it fit in to the
existing statutory exclusion to give rise to the bill. The
Committee may wish to consider whether blessing this kind
of transaction for property taxes is a sanction for
aggressive tax planning. The Committee may additionally
wish to consider adopting a seven-year sunset to review AB
15x in the future, especially given the evolutionary trend
in financing mechanisms.
6. Exemptions or exclusions ? Currently, active solar
energy systems are excluded from value for property tax
purposes, but are not exempt like public property,
agricultural crops, or household furnishings. Assessors
add the value of the system when reassessing a property for
a taxpayer who purchases a house with a solar array
attached, whereas they never include the value of exempt
items. This measure demonstrates that complex financing
AB 15x -- 3/22/11 -- Page 9
models for solar energy systems don't neatly fit into
categories in existing law guiding exclusions, and given
the public subsidies granted both within and without the
tax system, is it time for a full exemption for solar
technology? While an exemption would require a
Constitutional Amendment, it would certainly provide
clarity for taxpayers, assessors, and those in the solar
industry contemplating new ways of financing projects.
7. Urgency . AB 15x contains an urgency clause providing
that is provisions go into immediate effect.
Assembly Actions
Assembly Revenue & Taxation Committee: 7-0
Assembly Floor: 73-0
Support and Opposition (5/12/11)
Support : Board of Equalization Members Jerome Horton and
Betty Yee; SunEdison Inc.
Opposition : Unknown.