Since the tax exemption for solar energy electric systems was established, there has been debate among property owners and taxing jurisdictions about whether the exemption applies to systems that are under construction, but not yet in operation as of January 1 of the relevant tax year.
A solar energy electric system is defined as "all equipment used directly and exclusively for the conversion of solar energy to electricity," according to NCGS 105-275(45). Since systems under construction are not yet capable of converting solar energy to electricity, some taxing jurisdictions have attempted to read the word "used" as a limitation, denying the exemption for that construction in progress.
In January of this year, the Property Tax Commission addressed this issue In the Matter of the Appeal of Snow Camp LLC. After applying the rules of statutory interpretation and completing a detailed review of the Machinery Act, the Commission concluded that the exemptions do in fact apply to systems under construction, even though they are not yet capable of converting solar energy to electricity.
In reaching its decision, the Commission focused on two primary points.
- In enacting the exclusion, the legislature's intention was to encourage development of solar energy systems. That would not be accomplished, and in fact would produce a bizarre result, if we fully taxed this sort of equipment while under construction only to exempt 80% of its value upon completion.
- There is no other use for this kind of equipment other than the conversion of solar energy. Based upon prior case law in which exemptions containing use requirements were considered satisfied with respect to special use real property still under construction, the Commission found that solar farms under construction satisfy the use requirement of 105-275(45).
It is worth noting that the Commission’s decision was a split decision, with Judge Hunter, Chairman of the Commission, writing for the majority and Commissioners Peaslee and Guess concurring.
Vice Chairman Wheeler and Commissioner Penny dissented by separate opinion. In their dissent, they distinguished the cases upon which the majority relied and examined the legislative history of the statute. They further parsed the language of the statute itself, noting the use of the adverbs "directly" and "exclusively" to modify the verb "used." Finally, they concluded that the legislature intended the exclusion to apply only to property that is actually being used to convert solar energy in to electricity, and not to property that could be or will later be used to do so.
It does not appear that Alamance County has appealed the Commission's decision. So, unless and until there is another case on this point (or the legislature modifies the exclusion), the Commission's decision should be applied throughout North Carolina.