In a complete victory for renewable energy providers, the Arizona Court of Appeals published a unanimous opinion that the Arizona Department of Revenue (“Department”) improperly excluded the value of investment tax credits (“tax credits”) claimed under federal law from Arizona’s statutory formula for valuing renewable energy equipment. By excluding the tax credits from the valuation formula, the Department overvalued the taxpayer’s solar facility by a cumulative value of $335 million – massively increasing its tax liability.
Clearway Energy operates the Agua Caliente solar-power-generation facility in Yuma County, Arizona. When commissioned in 2014, Agua Caliente was the largest solar facility in the world with construction costs totaling over $1.5 billion.
Arizona has a multi-step, cost-based formula for valuing renewable energy equipment for property tax purposes. On its face, the statutory formula is relatively straightforward. It first requires determining the “original cost” of the renewable energy equipment, which is the actual cost to acquire or construct the property. The second step subtracts the “value of investment tax credits” from the “original cost” to derive what is termed the “taxable original cost.” Then the applicable depreciation is deducted from the “taxable original cost.” Finally, the resulting depreciated cost is multiplied by twenty percent, yielding the equipment’s “full cash value.”
At issue in the case was the correct interpretation of the meaning of “value” in the phrase “value of investment tax credits” in the second step of the formula. To better appreciate why the term “value” is important, it first requires an understanding of what investment tax credits are and the role they play in the development of solar energy projects. Congress created a provision in the internal revenue code as an incentive to develop renewable energy projects that allows a dollar-for-dollar tax credit equal to 30% of the qualified acquisition cost of renewable energy equipment in the year in which the equipment is placed into service. So, for every $1 spent on qualifying renewable energy equipment, an owner receives $0.30 of tax credits. These investment tax credits can be used to reduce a taxpayer’s income tax liability in the year in which the equipment is placed in service, or they can be carried forward for up to twenty years to reduce future income tax liabilities. The purpose of these credits is to promote the development of renewable energy production facilities.
Reducing the “original cost” by the “value of the tax credits” represents a significant reduction in the property’s “taxable original cost” and, in turn, its property tax liability. The taxpayer’s position was that the “value” of the tax credits was determined when Agua Caliente placed the equipment in service and the credits claimed, regardless of when the tax credits are ultimately used. This is consistent with how tax credits are treated under federal tax law. The Department’s position was that tax credits do not have “value” until the equipment owner actually uses them to reduce its income-tax liability. In this case, one of the investors immediately used its portion of the tax credits to offset its federal income tax liability, while the other investor chose to carry forward the tax credits. Thus, the Department reduced the “original cost” by the “value” of the first owner’s tax credits but excluded the second owner’s proportionate share of tax credits in determining the project’s “taxable original cost”—which artificially inflated Agua Caliente’s tax liability.
The Court of Appeals ruled that the unambiguous term “value” means the full amount of the claimed tax credit, even before it is used to reduce the owner’s federal tax liability. The Court held that a plain reading of “value” within the context of the statute “appli[ed] to the … equipment,” not to the owner. Thus, the Court found that whether the owner uses the tax credits does not impact the valuation of Agua Caliente’s property.
The court also observed that the Department’s interpretation necessarily leads to the conclusion that the legislature intended to value identical renewable energy equipment differently based on the owner’s federal income tax liability. The Court recognized that the Department’s position would result in a greater tax burden on the specific taxpayer than would be imposed on equipment “whose owner has zero taxable income than on equipment whose owner has billions of dollars in taxable income for no reason other than that the owner has a greater income.” The Court pointed out that such an interpretation is unreasonable and “contrary to the ad valorem nature of Arizona’s property tax system,” which taxes the property itself rather than its taxpayer owner.
The Court of Appeals’ opinion overturns the tax court’s grant of summary judgment in the Department’s favor and granted summary judgment in favor of Agua Caliente and awarded Agua Caliente its attorneys’ fees and costs.
Douglas S. John, along with Bennett Evan Cooper of Dickinson Wright, PLLC, represented Agua Caliente Solar, LLC in the Arizona Court of Appeals. If you have questions about this issue, please contact Mr. John by email at djohn@frgalaw.com.
