# Domestic content calculations

June 23, 2023 | By Keith Martin in Washington, DC

Project developers are having a hard time getting the data they need from manufacturers to do the calculations required to claim a domestic content bonus tax credit.

The US Treasury appears to have made the calculations easier for some equipment like wind turbines and solar trackers.

The Treasury and White House are aware of the problems and may have to rework the guidance that the government put out in May. (For more details about the guidance, see "Domestic Content Bonus Credit.")

The Inflation Reduction Act allows a 10% bonus tax credit for using enough domestic content.

Developers must divide the equipment and other materials coming to the project site for incorporation into a project into two categories: construction materials and manufactured products.

Construction materials are items that are primarily steel or iron and are structural in nature. They must be 100% US-made. Examples are rebar and steel foundation posts at solar projects. The rest of the materials used in the project are "manufactured products" that, as a group, must be at least 40% US-made initially, increasing to 55% over time. (The starting percentage for offshore wind is only 20%.)

Developers need factories from whom they procure equipment to disclose three "direct costs" in order to do the manufactured products calculation. The direct costs are the wages paid to workers to make the equipment, payroll taxes on those wages, and the amount paid to suppliers for parts supplied directly to the factory.

To date, manufacturers have been reluctant to disclose this information, even though disclosing the three direct costs is a far cry from disclosing their profit margins. Manufacturers have lots of other costs, including depreciation, rent, overhead, employee benefits, insurance and property taxes.

Some manufacturers have offered percentages, but percentages do not tell the developer what it needs to do the calculation.

Foreign manufacturers and US manufacturers that use all-US components could get away with giving developers a single number: the sum of the three direct costs.

However, most US factories use some imported parts. Any such US factory would have to provide two numbers: the sum of its three direct costs to put in the denominator and a single number to put in the numerator. The numerator number is the sum of costs paid by the US factory to its US parts suppliers.

Some foreign manufacturers have suggested that if they use all US-made components, this allows the full factory cost to go in the numerator. It is hard to see how that is true. The foreign factory would have to have no more than merely assembled the product like a piece of Ikea furniture rather than to have done any manufacturing.

The Treasury appears to have made a policy call to let wind turbines, trackers and some other products be treated as manufactured at the project site. That would make the construction contractor the "manufacturer," and the focus would shift to the contractor's direct costs rather than the costs of the factory. Construction contractors tend to be more transparent about their costs.

Table 2 in IRS Notice 2023-38 lists the main components in utility-scale solar, onshore wind, offshore wind and storage projects.

The table shows a "wind turbine" as the manufactured product, made from "manufactured product components" consisting of a nacelle, blades, rotor hub and power converter. The government appears to read this to mean that whoever puts the equipment together to make the turbine is the manufacturer. Since this occurs at the project site, that makes the construction contractor the manufacturer, notwithstanding what the contractor does seems closer to assembly than manufacturing.

The table lists a "photovoltaic tracker" as a manufactured product. Trackers are put together on the project site using components from various companies. The tracker company basically assembles a kit that goes to the project site. The government appears to read the table to say that the construction contractor pulling the kit together is the manufacturer.

The domestic content rules remain in flux. First Solar stock increased 26.48% immediately when the domestic content guidance was released after the market decided that it was a big winner. However, the stock price gave up the entire gain over the next month in a sign the market was having trouble figuring out how the guidance works.