The New York State Department of Taxation and Finance recently published an advisory opinion that explains how a sales tax exemption applies to equipment and related services used in a solar power facility.
New York’s sales tax provides an exemption for “machinery or equipment used or consumed directly and predominantly in the production of …electricity… for sale” (N.Y. Tax Law § 1115(a)(12). However, the machinery or equipment must be used “directly and predominantly” during the electricity production phase. After defining what constitutes the production phase, the opinion concludes that the facility components necessary to collect the solar energy and which are used to combine that electricity, up to the point the inverter changes the DC current to AC current, are used directly and predominately in the production of electricity for sale and therefore exempt. This equipment includes the solar panels, racks, combiner boxes, all wires and connections connecting these items to the inverter, and the inverter itself. The cost for installing such equipment is also exempt from sales tax. The supervisory control and data acquisition (SCADA) system is exempt from tax so long as it used directly and predominantly in the operation of the solar facility.
However, the opinion also states that the transmission or distribution of electricity is outside the production process. Consequently, any interconnection equipment components, substation equipment, meters, wire, intra-solar facility electrical collection equipment, cables, junction boxes, poles, step-up transformers, or other equipment used beyond the inverter are not exempt from tax. The opinion notes that some of this material may qualify as a tax-exempt capital improvement, though special rules apply to leased property.
Finally, the opinion concludes that certain module warranty charges and energy warranty charges are exempt from tax. In this case, the module warranty charges relate explicitly to the exempt production equipment. Because the underlying equipment is exempt, so too is its warranty. But taxpayers should be careful with respect to warranties. The opinion states warranties that cover both taxable and exempt property for one, single price would be subject to sales tax. Thus, it is important to separately state warranty charges for exempt property from warranty charges on non-exempt property. The energy warranty guaranteed that the solar panels would produce a specific amount of electricity in a 20 year period. The opinion concludes that such guarantees are not subject to tax.
Joseph Endres is a partner in the State & Local Tax Practice at Hodgson Russ LLP. You can reach him at firstname.lastname@example.org.