Jurisdictions Vary in Approach to Taxing Sustainable Measures

"Governments are trying to strike a balance between encouraging (sustainability) and finding taxable value."

By Philip J. Giannuario, Esq. & Brian A. Fowler, Esq., Commercial Property Executive, July 2012

As energy prices soar, the search for economical alternative energy has become a pressing issue for all consumers, including businesses. Solar power represents a burgeoning alternative to fossil fuels. "Green" is all the rage in society today. But it can take a toll in the tax department.

With plentiful open rooftops on big-box retail and warehouse buildings across the country, installation of solar arrays makes sense, on its face, for both the building owner and the solar provider. The building owner can obtain low-cost electricity for its business, while the solar provider benefits from federal tax credits. Solar panels make use of available real estate with zero negative impact on the environment.

But there are assessment issues surrounding structures erected to deliver the new energy.Property tax treatment of this evolving building attribute varies by jurisdiction. Governments are trying to strike a balance between encouraging greater use of sustainable energy systems and finding taxable value in the equipment that generates and transmits the new energy. It stands to be a new source of revenue for taxing authorities if the state is silent as to its taxability.

California has exempted systems built between 1999 and 2016. For the property owner in New Jersey, a renewable energy system that provides all or a portion of the building's energy needs can be deemed to have no effect on the building's assessed value. (While unstated, it is anticipated that a third party would be obligated to pay taxes on the equipment's value.) In Texas, onsite systems are exempt. In states like New Hampshire and Virginia, the effect on property taxation is left to local rule. Some states, such as Utah, have not specifically passed legislation on the matter.

Most jurisdictions have dealt with property tax issues by writing legislation that embraces many forms of sustainable energy. Pennsylvania, by contrast, has focused more on wind turbines, designating the turbine, tower—and even the foundation—as tax exempt.

In states that have remained silent on the issue, the question of taxability is often reduced to an argument over the definition of business personal property versus real property. This frequently centers on the issue of whether the property can be removed.

For the owner-user, solar panels are easily moved from one location to another and could be considered business personal property, but the structure that connects them to the building and its electrical system—or to the electrical grid—is not. The municipality could choose to assess those components of the system as it does electrical systems. Most states have legislation in place to provide the assessor with guidance on addressing business personal property if it is to be taxed as real property.

New Jersey, which exempts business personal property as real property, is also representative of a more disconcerting circumstance: the extension of an exemption only to the owner-user of the power. While the owner-user is entitled to special protection from ad valorem taxation, it is withheld from for-profit entities such as an investor or utility company.

Furthermore, often the owner-occupier that opts to lease its rooftop for the installation of a solar array where the power supplies the building and the excess power is sold to the market could receive an added assessment notice. There are many situations in which a solar firm owns the panels and obtains federal tax credits that can be sold to utilities, all while selling the energy to the building occupants or to the local utility company.

Is the income approach available to the assessor based on the lease rates on the rooftops? Or should the cost approach be implemented to reflect the cost to install the system? Will assessors attribute more value to the roofs of buildings without solar arrays because there is unrecognized potential there? It will be interesting to see how the assessing community reacts to these evolving trends in energy production. Will they go green or go for the green?

Philip J. Giannuario is a partner and Brian A. Fowler an associate at the Montclair, N.J., law firm Garippa, Lotz & Giannuario, the New Jersey member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Giannuario can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Fowler at This email address is being protected from spambots. You need JavaScript enabled to view it..