Offshore wind farms are used in the United States for tax purposes if the electricity is used in the United States, the IRS said in a private letter ruling.

The agency analyzed the place of use of a wind farm that a developer planned to build five to 11 miles offshore.

Equipment used in the United States qualifies for more generous tax benefits than equipment “used predominantly outside the United States.” The US treated its boundaries as extending three miles offshore from 1793 until President Reagan declared in 1988 that the US boundary extends 12 nautical miles out to sea, following the lead of 104 other countries that had already claimed jurisdiction to 12 miles offshore. However, it remains unclear what effect the Reagan proclamation had on various domestic laws, including the US tax laws.

In this case, the project was potentially physically outside the United States.

However, rather than try to settle where the US border ends for tax purposes, the IRS relied on a “functional use test.” All of the electricity from the project would be sold to two utilities on the US mainland. Since the functional use of the project is to supply electricity for consumption in the United States, the project should be considered used in the United States, the IRS said.

The ruling is Private Letter Ruling 201510038. A redacted version was made public in March.

by Keith Martin in Washington