Partial Sales Tax Exemption for Renewable Energy Equipment in California

In the course of extending California’s cap-and-trade program this summer, the legislature also cut the sales tax rate by around 50 percent for solar panels, wind turbines and other equipment used to generate electricity from sources other than fossil fuels or nuclear or hydropower facilities.

These changes, enacted in Assembly Bill 398 (“AB 398”), come as welcome news to those in the renewable energy industry, including solar, wind, geothermal, and biomass contractors, developers and facility owners.

Background
AB 398 expands an existing partial exemption that was limited to manufacturers. For sales and use tax before July 25, 2017, existing law provides a partial sales and use tax exemption that reduces the total state and local combined sales tax by 3.9375 percentage points. See Cal Rev & Tax Code § 6377.1. Among other enumerated uses, this exemption applies to the sale or use of any qualified tangible personal property (1) purchased for use by a qualified person to be used primarily in any stage of manufacturing, processing, refining, fabricating, or recycling of tangible personal property, or (2) purchased for use by a contractor purchasing that property for use in the performance of a construction contract for the qualified person, that will use that property as an integral part of the manufacturing, processing refining, fabricating, or recycling of tangible personal property.

The term “qualified tangible personal property” generally includes machinery and equipment, all component parts, and equipment or devices used or required to operate, control, regulate, or maintain the machinery, including computers, data-processing equipment, and computer software.

The term “qualified person” means a person primarily engaged in one of the lines of businesses specified in North American Industry Classification System (NAICS) under Codes 3111-3399, and 541771 and 541772. These classifications generally include manufacturers and certain biotech and life science research and development companies, but not electricity producers.

The exemption does not apply to any tangible personal property purchased during any calendar year that exceeds $200,000,000 of purchases of qualified tangible personal property. For purposes of this limitation, in the case of any qualified person that is required or authorized to be included in a combined report, the aggregate of all purchases of qualified tangible personal property for which an exemption is claimed may not exceed $200,000,000. Additionally, the exemption does not apply to the sale or use of property that, within one year from the date of purchase, is removed from California or converted to a non-qualifying use.

Thus, although certain equipment and machinery used to produce electricity has historically been eligible for the partial exemption, such machinery and equipment was only eligible if the equipment and machinery was used primarily to run manufacturing equipment.

2017 Changes
AB 398 made several changes to extend the exemption to certain electric power generators:

• Added an exemption for the sale or use of qualified tangible personal property purchased for use by a qualified person primarily in the generation or production, or storage and distribution, of electric power. This includes storage and distribution through the electric grid, but not transmission of electric power to consumers.
• Effective January 1, 2018, the definition of the term “qualified person” will include solar, wind, geothermal, biomass, and certain other electric power generators. Effective January 1, 2018, AB 398 expands the definition of qualified tangible personal property to include buildings and foundations used as an integral part of generation or production or storage and distribution of electric power.

Combined, these amendments should provide significant sales tax relief for solar, wind, geothermal, biomass, and certain other electric power generators and contractors constructing such electric power generating facilities.

The partial sales tax exemption was scheduled to expire on July 1, 2022, but AB 398 extended the sunset date to July 1, 2030.

Open questions
Because of the January 1, 2018, effective date, there is some ambiguity regarding whether purchases by or for electric power generators that are made before January 1, 2018, will be eligible for the exemption. Certain advanced planning techniques may be utilized to help taxpayers that are currently developing projects to take advantage of the partial exemption.

Additionally, certain provisions appear to apply retroactively to the original July 1, 2014, effective date of the statute, and some taxpayers may be entitled to a refund for property purchased on or after July 1, 2014 and before January 1, 2018. With the amendments to the statute and the shift in sales tax oversight from the California Board of Equalization to the California Department of Tax and Fee Administration, companies should stay tuned for updates to the regulations and documentation requirements for claiming the exemption.