Earlier this year, the Ohio legislature passed a bill that is intended to lower the cost of solar, wind and clean-coal energy, and Gov. Ted Strickland signed an executive order that immediately put the bill into action. Upon further inspection, it appears that the rush to provide relief to the owners of smaller solar projects has only made life more complicated for commercial-scale solar projects.
At the very least, State Bill 232 and Strickland’s executive order leave many unanswered questions for projects that utilize a Power Purchase Agreement. From the Ohio sales tax perspective, it is unclear if the array is real or personal property when it is subject to an interconnection agreement with the host of the array.
The existing definitions of real and personal property, as set forth in Ohio law, specify that items not unique to the business being conducted on the premises are likely considered real property (as fixtures or improvements). If the PPA is designed to produce power principally for use by the host, the array becomes the primary provider of electric power to the building, and the power from a public utility is secondary. If the project is considered real property, it creates an issue with the solar installer, who is deemed to be the consumer and is subject to sales tax. If the finished project is considered personal property, then the owner of the array is subject to sales tax.
There is an exemption available for projects that are defined as personal property, and it appears to be failsafe. But the lack of clarity as to real-versus-personal property will create issues between the owner and the installer. We have requested written guidance from the Ohio Department of Taxation.
If the project is considered real property, then an “energy conversion facility” exemption will apply for property and sales tax purposes, but the exemption appears to exclude the solar panels and the racking system, which are the most expensive portion of an array. That means the project is partially subject to sales tax and partially subject to property tax. If the array is 250kW or more, then the owner is confronted with paying potentially annually decreasing property taxes on the taxable portion of the array or determining if the fixed annual payment in lieu of property taxes will be more cost-effective in the long run.