With this blog, we hope to keep you up to date on impactful changes in the sales tax compliance, especially in New York State. The All About Sales Tax blog is written by a team of Hodgson Russ tax attorneys and its primary author, Joe Endres. The blog will review legislative and administrative changes in the sales tax; we’ll discuss new sales tax case law; and highlight the enforcement initiatives and tactics we’re seeing while defending businesses in sales tax audits.

A Sales Tax Boost for the Energy Storage Industry?

Energy Storage: The Nuts and Bolts

Using either batteries or mechanical means, energy-storage systems allow surplus power from a generating source to be stored and redistributed as needed.  While these systems are often installed as a component of a generating system (solar, wind, etc.), the past few years have seen a rise in stand-alone energy storage systems that serve the electric power-grid itself.  One of the chief functions served by storage systems (both stand-alone systems and those linked with generating equipment) is to resolve intermittency problems with renewable energy sources such as solar and wind, whose production is inherently prone to fluctuations.  Stand-alone energy-storage systems can also assist in regulating the electric power grid generally, by removing, storing, and redistributing power based on fluctuations in demand.

But whether connected to a generating source or serving the grid as a stand-alone system, energy-storage systems have occupied somewhat of a no-man’s land when it comes to sales tax exemptions and incentives.  The proposed legislation, introduced in April by Assemblyman Michael Cusick (D-Staten Island) and Senator David Parker (D-Brooklyn), would change that by broadly exempting both the sale and installation of energy-storage system equipment on residential or commercial property.  Without an exemption directly covering them, energy-storage systems, by their nature, fall outside of several existing sales-tax exemption that benefit other segments of the energy industry. 

Exemptions, Exemptions Everywhere, But Not One to Apply

First, New York provides an exemption under Tax Law § 1115(a)(12) for the purchase and installation of machinery and equipment for use “directly and predominantly in the production of…gas, electricity, refrigeration or steam for sale…by generating”.  This is the same “production” exemption applicable to machinery and equipment used in traditional manufacturing.

However, the regulations make it clear that only equipment used directly in the “production” phase of a product qualifies.  Equipment used in a producer’s “distribution” phase, by contrast, would not qualify.  That phase, by regulation includes “all operations subsequent to production, such as storing, displaying, selling, loading and shipping finished products.” (20 NYCRR § 528.13(b)).  The New York State Department of Taxation and Finance (the “Department”) opined in a 2009 advisory opinion[1] that a stand-alone “flywheel” energy storage system would not qualify for the “production” exemption.  This was based on two findings: (1) that the role of the system was not to “generate” of electricity for sale, since its function was to remove already-generated electricity from the power grid and redistribute that existing electricity; and (2) that even if the system could be deemed to “generate” electricity, vis-à-vis distributing it back onto the grid, the system wasn’t used “predominantly” (i.e., more than 50% of the time) for that purposes, as opposed to removing and storing electricity.  Other opinions issued by the Department have found that even equipment installed at a generating facility like a wind farm or solar plant would not qualify for the “production” exemption if the equipment (e.g. transformers, substation equipment, transmission lines, etc.) was tied to the distribution and transmission of electricity as opposed to its “generation”.  This likely precludes energy-storage systems from the exemption where installed at a generating facility.

Similarly, energy-storage systems currently struggle to meet the sales tax exemption provided for “capital improvements to real property.”  Based on advisory opinions issued to several developers of wind and solar generating facilities, machinery and equipment that is merely fastened to concrete foundations by bolts or similar means and could be removed without material damage generally won’t meet the statutory test for a capital improvement. That test requires (among other things) that any addition to real property be “permanently affixed to the real property so that removal would cause material damage to the property or article itself.”[2]  While the concrete foundations for the equipment itself and other site improvements at a generating facility such as fencing, access roads, etc., have been found to meet this test, items like transformers, substation equipment and similar equipment merely bolted to such foundations have been found to fail.

And finally, while New York State has assisted the solar-energy industry by exempting the sale and installation of both residential and commercial “solar energy systems”, stand-alone energy storage systems or other storage systems not tied directly to a solar-energy system would fall outside the definition.

The Proposed Fix

The Sponsor’s Memorandum supporting the proposed energy-storage exemption acknowledges these hindrances as contributing to the high cost of deploying and siting energy-storage projects, even while the State has been actively promoting energy storage as “a key enabling technology to achieve the state's renewable energy and climate goals, providing increased grid flexibility, enabling the wide scale deployment of renewable energy, promoting efficient use of grid resources, and enhancing grid resiliency.”

The proposed exemption, specifically, would cover “the retail sale of, and consideration given or contracted to be given for, or for the use of, [commercial or residential] energy storage systems and the service of installing such systems.”  An “energy storage system” is defined as “an arrangement or combination of components installed upon [residential or non-residential] premises that stores electricity for use at a later time to provide heating, cooling, hot water and/or electricity.”

The proposed exemption, like the current exemption for solar energy systems, would allow local jurisdictions to opt-out and to continue to impose local sales tax on energy-storage systems.  Currently, all but eight local taxing jurisdictions statewide have opted out of providing the solar-energy systems exemption and impose tax at the local level.

[1] TSB-A-09(36)S, Aug. 21, 2009.

[2] N.Y. Tax Law § 1101(b)(9)(i)

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