Sales Tax Incentives

Description

Sales tax incentives provide an exemption from (or refund of) sales tax for the purchase and installation of solar energy components and systems. The goal of these policies is to reduce the investment costs of acquiring a solar-energy system. Although solar fuel is free, the capital costs for solar energy systems are high relative to traditional energy sources. Fossil fuel inputs are typically exempt from sales taxes, resulting in a relatively higher sales tax burden on solar investments. While state legislatures shape state sales tax policy, local governments also control a portion of sales taxes in some cases.

Sales tax rates vary by state and locality. For 2012, state sales tax rates ranged from 2.9% in Colorado to 7% in Indiana, Mississippi, New Jersey, Rhode Island and Tennessee. Most state rates fall in the range of 4% to 6%. Five states -- Alaska, Delaware, Montana, New Hampshire and Oregon -- do not have a sales tax. New Mexico does not have a sales tax, but it has a gross receipts tax in which businesses are taxed on the gross amount of their business receipts each year. (This policy effectively functions as a sales tax for businesses.) Thirty-six states also allow sales tax at the county, municipal or special district level, adding as much as 8% in sales tax.[1],[2]

Although sales tax relief reduces the cost of solar-energy systems, these savings alone are not likely to stimulate significant solar development. This policy option can encourage individuals to invest in solar where sales tax rates are high and where complementary policies (e.g., rebates, net metering, solar access laws) are in place.

Status & Trends

State sales tax incentives for solar projects, currently in effect in around 20 states, usually take the form of a full exemption from the state portion of the sales tax on the cost of solar-energy equipment. The purchaser typically presents a certificate of exemption to the seller that documents the exemption that the purchaser is claiming. The seller retains the form to verify to the state that the sale was exempt from taxation. (Idaho was one exception where the incentive was a refund of sales tax paid as opposed to an up-front exemption, but its incentive expired July 1, 2011.)

State sales tax incentives that apply to solar energy usually target renewables in general, but only electricity-generating renewables are eligible in a few states, including Utah and Washington. Several states, including

Ohio, Utah and Wyoming, restrict the exemption to businesses or to systems that meet certain minimum size requirements. Massachusetts, on the other hand, only offers the incentive for residential systems.

While states provide at least a brief description of the solar technologies exempt from sales tax, Florida and Arizona have established a detailed list of the types of solar-energy equipment that qualify.

As is the case with property tax exemptions, local governments authorized to offer exemptions from local sales taxes may choose to offer this benefit to residents and businesses that purchase and install solar-energy systems. In 2007, Colorado authorized counties and municipalities to offer local sales tax rebates or credits to residential and commercial property owners who install renewable-energy systems.

Examples

Florida exempts solar-energy systems and components from the state's sales tax. The original law, established in 1997, was scheduled to expire in 2002, but it was extended and subsequently made permanent. The Florida Solar Energy Center certifies a list of equipment and hardware eligible for the incentive, including solar components related to space heating and cooling, domestic water and pool heating, and photovoltaics (PV). The Florida Department of Revenue provides a sample form to help sellers document exempt sales, as required by law.
New York provides an exemption from the state's 4% state sales and use taxes and the 0.375% sales and use taxes imposed by the state in the Metropolitan Commuter Transportation District (MCTD) for receipts from the retail sale and installation of residential solar-energy systems. A residence may be owned or rented, and it may include a single-family house or a multi-family building, including apartments and condominiums. In addition, the state authorizes municipalities and counties, including New York City, to grant this exemption from their local sales and use taxes. Around 20 local taxing jurisdictions in New York offer a local sales tax exemption for solar projects. The New York Department of Taxation and Finance publishes a variety of sales tax reports detailing local tax rates and exemptions, including those for solar-energy equipment (Publication 718-S). Effective January 1, 2013, this exemption also applies to non-residential systems.
In 2006, the City of Boulder, in Colorado, established a sales and use tax rebate for PV and solar water-heating systems. System owners may receive a rebate (essentially a tax refund) drawn from the unrestricted tax revenues collected from solar installation sales. Approximately 55% of solar sales and use tax revenues go to restricted funds. Of the unrestricted revenues, 35% percent is refunded to the solar system owner, resulting in a refund of about 15% of the city sales tax paid. Interestingly, the remaining 65% of the unrestricted revenues are directed to Boulder’s Solar Grant Program, which funds solar installations on affordable housing developments and site-based non-profit organizations.

Resources

DSIRE: Summary of Sales Tax Incentive Policies in the U.S. DSIRE, 2012.

Footnotes

[1] http://www.salestaxinstitute.com/rates.html
[2] http://www.taxpolicycenter.org/briefing-book/state-local/specific/sales.cfm

Disclaimer: The information presented on the DSIRE web site provides an unofficial overview of financial incentives and other policies. It does not constitute professional tax advice or other professional financial guidance, and it should not be used as the only source of information when making purchasing decisions, investment decisions or tax decisions, or when executing other binding agreements. Please refer to the individual contact provided below each summary to verify that a specific financial incentive or other policy applies to your project.

While the DSIRE staff strives to provide the best information possible, the DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. make no representations or warranties, either express or implied, concerning the accuracy, completeness, reliability or suitability of the information. The DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. disclaim all liability of any kind arising out of your use or misuse of the information contained or referenced on DSIRE Web pages.

Copyright 2012 - 2013 North Carolina State University, under NREL Subcontract No. XEU-0-99515-01. Permission granted only for personal or educational use, or for use by or on behalf of the U.S. government. North Carolina State University prohibits the unauthorized display, reproduction, sale, and/or distribution of all or portions of the content of the Database of State Incentives for Renewables and Efficiency (DSIRE) without prior, written consent.