Was solar electricity sold under a power-purchase agreement exempt while leasing the photovoltaic equipment remained taxable in Virginia?

Subject

Electricity produced by the photovoltaic system/Master lease agreement and a power purchase agreement.

Plain-English summary

Virginia distinguished a sale of electricity from a lease of solar equipment. Under the described power-purchase agreement, electricity generated by a photovoltaic system was converted to alternating current and delivered through electrical lines into the utility grid for host-customer consumption. That electricity qualified for the sales-tax exemption for electricity delivered through mains, lines, or pipes.

The proposed equipment-lease program produced the opposite result. The customer's electricity was unmetered, and the Department viewed the true object as leasing photovoltaic panels and related tangible personal property rather than buying electricity. Gross lease proceeds were therefore generally taxable under 23 VAC 10-210-840.

The systems included panels, racks, wiring, inverters, meters, monitoring equipment, connectors, and other electrical components. The taxpayer would lease the projects from an owner or developer, assume long-term customer agreements, and retain the lessor to provide services.

The ruling was conditional: the Department had requested but had not received either form of customer agreement. Its conclusions rested solely on the facts described in the request and a later telephone conversation.

What this means for you

Solar developers and financiers

The contract's true object matters. A metered sale of electricity delivered through lines received different treatment from an unmetered right to use solar equipment.

Host customers

Calling an arrangement a lease or power-purchase agreement is not enough by itself. Pricing, metering, property rights, and actual delivery terms can determine whether the customer is buying exempt electricity or leasing taxable equipment.

Tax professionals reviewing older agreements

Do not apply the result without the contract. The Department expressly lacked the operative agreements and reserved a different result for changed or additional facts.

Common questions

Q: Why was electricity under the power-purchase agreement exempt?
A: It was delivered for consumption through electrical lines connected to the utility grid.

Q: Why was the equipment lease taxable?
A: The unmetered arrangement appeared to have the lease of tangible personal property as its true object.

Q: Would electricity delivered by battery qualify for the same exemption?
A: No. The ruling said delivery by battery did not satisfy the mains, lines, or pipes requirement.

Citations and references

• Va. Code § 58.1-609.1(3).
• 23 VAC 10-210-840.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-57

Original ruling text

April 25, 2014

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on the application of the Virginia retail sales and use tax to transactions by a special purpose entity owned and controlled by * (the "Taxpayer").

FACTS

The Taxpayer, as lessee, will lease multiple distributed photovoltaic generation systems and the contractual rights thereof (the "Projects") for a period of ten years or less from a project owner or developer (the "Lessor"). At the time of the lease of the Projects to the Taxpayer, the Lessor will have entered into leases or power purchase agreements (the "Customer Agreements") with respect to each project with residential, commercial, or governmental customers (the "Host Customers") for a term of 20 years or more. The Lessor will also assign all of its rights and obligations under the Customer Agreements to the Taxpayer, and the Taxpayer will assume all of these rights and obligations. To discharge its obligations under the Customer Agreements, the Taxpayer will retain the Lessor to provide the necessary services under a master services agreement. In addition, the Lessor will generally execute an agreement to pass its rights to a federal energy credit to the Taxpayer for the Projects.

The photovoltaic generation systems include photovoltaic panels ( i.e. , solar panels), racks, wiring and other electrical devices, conduit, weatherproof housings, hardware, inverters, a remote monitoring system, connectors, meters, disconnects, and over current devices. With respect to residential customers, the direct current electricity generated by photovoltaic systems located on or adjacent to a residential building will be transmitted through a wire connecting the photovoltaic system to a grid tied inverter, which converts the direct current electricity into alternating current electricity for use and consumption in the residence.

In a recent telephone conversation with one of the Department's tax analysts, you further indicate that the Taxpayer plans to offer two different system programs in Virginia, i.e. , a master lease agreement and a power purchase agreement. In a power purchase agreement, the electrical power produced by a photovoltaic system is delivered daily into the grid to be credited against the power used at night while the system is not producing power. The customer pays for the power that exceeds the credit allowance. In a lease agreement, the customer is merely leasing equipment and the power is not metered for credit by the Lessor. While requested by the tax analyst, neither agreement has been furnished to the Department for its consideration in this matter.

The Taxpayer asks for a ruling as to whether the delivery of electricity from the photovoltaic systems described above will qualify for the exemption under subsection 3 of Va. Code § 58.1-609.1.

RULING

Virginia Code § 58.1-609.1 3 provides an exemption from the retail sales and use tax for "Gas, electricity, or water when delivered to consumers through mains, lines, or pipes." [Emphasis added.] Thus, electricity delivered to a consumer through a line or wire is exempt from the retail sales and use tax. However, the delivery of electricity by other means, such as by battery, does not qualify for the above cited exemption.

In this case, electricity is delivered to a residence via an electrical line connected to the power grid of a utility company. Although the direct current electricity produced by the photovoltaic system is converted into alternating current and delivered into the power grid of the utility, the electricity in such instance is for consumption by the Host Customers and potentially by other connected users of the electricity. Under a power purchase agreement as described above, I find that the electricity sold to the Host Customers qualifies for the above cited exemption.

Alternatively, an equipment lease agreement is generally for the lease of tangible personal property. Pursuant to Title 23 of the Virginia Administrative Code 10-210-840, the gross proceeds received from the lease of tangible personal property are generally subject to the retail sales and use tax. Based on the facts presented, in lieu of a review of the Customer Agreements, and because the delivery of electricity in a lease agreement is unmetered, the true object of the transaction would generally appear to be for the lease of equipment and not for the sale of electricity to consumers. Accordingly, the above cited exemption has no application with respect to the lease agreements contemplated by the Taxpayer.

This response is based on the facts provided as summarized above and issued without review of the Customer Agreements. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5496116905.R