February 05, 2013 | By Keith Martin in Washington, DC

California said a property tax exemption for new solar facilities applies not only to solar panels mounted on rooftops, but also to large-scale solar projects. New solar systems in California enjoy a one-time exemption from property tax assessment. An assessment will be triggered if the project is later resold or there is a change in control of the company owning the project. Property taxes vary by county. They can be as high as 2% of assessed value, and must be paid annually.

The State Board of Equalization rejected a suggestion by Inyo and Riverside counties in November that the exemption does not apply to utility-scale projects. 

In December, the board released a set of final guidelines for local property tax assessors about the solar tax exemption. 

The exemption grew out of a ballot initiative called Proposition 7 that the California voters passed in 1980 and that was later implemented by the state legislature as section 73 of the state tax code. It has had to be periodically renewed by the legislature and will expire at the end of 2016 unless renewed again.

The exemption applies only to “active solar systems” that are assessed locally. California assesses power plants that are 50 megawatts or larger in size and are owned by “electric corporations” at the state level. Other projects, including solar projects that are “qualifying facilities” for federal regulatory purposes (which covers most solar projects of up to 80 megawatts in size) are assessed locally.

According to the guidelines, if a builder completes a new house with a solar system on the roof and has not sold the house by the lien date when real property is assessed, then the builder will use up the one-time solar exemption, and anyone buying the house later will have to pay annual property taxes on the system. Tax equity transactions to finance solar systems in the state should not be treated as a change in ownership that triggers an assessment. However, there are limits. A sale-leaseback of a system within three months after the system was originally put in service is okay. However, an assessment will be triggered when the lessee exercises any purchase option. Partnership flip transactions, including the later flip down in the tax equity investor’s ownership interest, do not trigger an assessment. However, if the solar company or a third party later acquires more than a 50% interest in partnership profits and capital — other than the flip that occurs automatically under the partnership agreement — then an assessment will be triggered. In a utility-scale plant, the solar “facility” that escapes property taxes is all the equipment through the step-up transformer.

Parking lot canopies qualify for the exemption as part of the solar system if they are built mainly to provide a mounting surface for solar panels while only incidentally providing shade for autos.

Leasing a solar system to a customer does not trigger an assessment. Neither does a change in the customer to whom the system is leased. The average homeowner in California remains in his house only seven years. A sale of the house to a new owner who assumes the lease will not subject the solar system to property taxes. However, the guidelines say that a buyout payment by the original customer to terminate the lease would trigger assessment. It is hard to understand the logic, since ownership of the system has not changed.

Contributing a solar system to a legal entity will trigger an assessment, unless each owner retains the same ownership percentage interest in the system after the contribution as before. A change in control of an entity that owns the solar system will trigger assessment. The exemption will also be lost if the entity’s “original co-owners” cumulatively transfer more than 50% of their ownership interests in the legal entity.

Solar companies sometimes have an easement to put their systems on customer roofs in cases where the customer is merely leasing a system or buying electricity. The guidelines warn that the solar company may have a taxable possessory interest in the roof that is not covered from the property tax exemption for the solar equipment.