Leased solar panels are facing property taxes

• Leased solar panels previously were interpreted to be exempt from property taxes%2C but no more.
• The Department of Revenue interprets leased solar panels differently than those customers own.
• The solar industry is fighting the interpretation.

Thousands of Arizonans who lease solar panels could start paying property taxes on those solar panels next year because of a new interpretation of state law, which solar companies are disputing.

Major rooftop-solar companies such as Sunrun Inc. and SolarCity Corp. fought but failed to change the interpretation through a proposal at the Legislature.

Solar leasing companies, which control the majority of new rooftop installations in Arizona, vow to fight the taxes in court if necessary to prevent their customers from paying an estimated $152 a year in taxes for a leased residential solar array, more for those on larger buildings.

"We won't let our existing customers pay for this and will fight this all the way to court if we have to," said Will Craven, senior public-affairs manager for SolarCity.

Leases are popular for middle-class customers who can't afford to buy expensive solar arrays. Schools and non-profit groups also often lease solar panels because they can't use the federal tax credits that make solar attractive. The tax liability of larger arrays can run thousands of dollars annually.

People who own household solar panels are exempted from property taxes on them. Up until a year ago, those who leased them assumed the same exemption applied, as did the companies providing the leases.

However, after a review, the Arizona Department of Revenue last year interpreted that law to mean that leased panels don't fit within the exemption for residential solar panels that customers own. It determined that leased panels are more like merchant power plants and should pay property taxes like them.

Based on that determination, a $34,000 solar-panel array leased by a homeowner would cost about $152 in property taxes in its first year, decreasing every year as the system depreciates, according to the department. By the 10th year the liability would fall to about $100, and about half that by the 20th year.

"That is a serious hit to many Arizonans' ability to save by going solar," Craven said.

Most residential customers who lease panels save $5 to $10 a month, or $60 to $120 a year. A $152 tax hit would eliminate savings from solar for most.

Officials from SolarCity and Sunrun said their leases are written in a manner that passes any tax liability on to the customer, so even though the Revenue Department sent tax notices to the solar companies, they can pass the costs to customers. But that is not something the solar companies want to do.

Sean Laux, the legislative liaison for the Department of Revenue, said the department expects to get reports from the companies that own the solar equipment regarding its value as soon as May. The first partial payments would be due in October 2015.

Even if the solar companies pay the taxes, it will increase the costs for new customers.

"As in all businesses, the end consumer pays the cost of higher taxes," said Bryan Miller, vice president of public policy and power markets for Sunrun Inc. "This is true whether it's APS including the costs of taxes in electricity rates, or Walmart including the cost of taxes in the price of bananas."

The solar industry tried and failed to get a change in the law through the Legislature and now plans to challenge the Department of Revenue, officials said.

"We believe the DOR interpretation is flawed legally and factually," Craven said. "We expect them to modify their interpretation before they end up taxing thousands of Arizonans."

Miller, from Sunrun, was equally optimistic that a solution would be found.

"(The Department of Revenue) created this issue when it re-interpreted longstanding Arizona law," he said. "As the head of the Executive Branch, it is up to Gov. (Jan) Brewer to ensure that thousands of Arizonans do not pay higher taxes. Arizona law has a principle that when a tax issue is ambiguous, it must be construed in favor of no tax. ... Gov. Brewer and DOR should follow this law now and publicly announce they will not enforce higher taxes."

Laux said the department will consider the facts but feels the issue is settled.

"The department is always prepared to accept new information that we hadn't had previously on which we based our conclusions," he said. "That is our standard. If they present us with a scenario that would cause us to revisit it, sure. But to date we have not received anything new."

Brewer's office declined to comment recently when asked about directing the Revenue Department to change its interpretation.

SolarCity and Sunrun officials said Arizona Public Service Co. is pushing for the taxes to slow down solar use.

APS officials said several times since February that they were neutral on the property-tax issue and did not lobby for it. However, Barbara Lockwood, general manager of regulatory policy for the utility, wrote a letter last week to utility regulators indicating APS favors the tax.

"Like Sunrun, APS owns distributed generation that provides services to customers including schools, government agencies and residential customers," Lockwood wrote. "APS pays, and has consistently paid, the legally mandated property taxes on this generation. It isn't complicated. It isn't ambiguous. It isn't hidden somewhere. It's the law."

She said that "it is wholly within Sunrun's power to pay the property taxes owed on its equipment rather than looking to their customers to bear that cost, or seeking yet another subsidy on the shoulders of Arizona residents through a tax exemption."

Lockwood also said APS would lobby for the tax.

"We will ensure that Arizona legislators are aware of these facts," she said.

APS has allies.

Kevin McCarthy, president of the Arizona Tax Research Association, supports leased solar panels being subject to property tax. McCarthy's group has executives from APS, Salt River Project and Tucson Electric Power on its board of directors, including an APS lobbyist.

"The exemption (on solar panel taxes) was not intended to extend to a solar company with millions of dollars of equipment being leased to homeowners," McCarthy said via e-mail.

Court Rich, an attorney representing the solar industry, said it is curious McCarthy's tax-research group, which bills itself as a taxpayer watchdog, would advocate for higher taxes on homeowners.

"Republicans hate taxes unless they are taxes on solar," Rich said.

He said he hopes Brewer gets involved and the Department of Revenue reverses its interpretation.

"Now it all rests in the hands of the governor, whose own agency created this mess with a flawed reinterpretation of a longstanding tax law," Rich said. "If the governor, who is often referred to as the solar queen, doesn't step in, then thousands of homeowners and hundreds of schools, churches, and community centers will be hit with this unexpected and unwarranted tax increase."

Tax estimates

Following are estimates on the first-year tax liability of various size solar arrays that are leased.

7.8-kilowatt residential system valued at $34,000: $152.

80-kilowatt commercial system valued at $360,000: $1,615.

250-kilowatt commercial system valued at $1 million: $4,485.

550-kilowatt commercial system valued at $2.2 million: $9,867.

Source: Department of Revenue