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35. LINDA LINGLE
GOVERNOR
JAMES R. AIONA, JR.
LT. GOVERNOR
STATE OF HAWAII
DEPARTMENT OF TAXATION
P.O. BOX 259
HONOLULU, HAWAII 96809
KURT KAWAFUCHI
DIRECTOR OF TAXATION
SANDRA L. YAHIRO
DEPUTY DIRECTOR
PHONE NO: (808) 587-1510
FAX NO: (808) 587-1560
September 17, 2007
TAX INFORMATION RELEASE NO. 2007-02
RE: Relating to the Renewable Energy Technologies Income Tax Credit
This tax information release will clarify some of the issues surrounding the renewable
energy technologies income tax credits provided by § 235-12.5, Hawaii Revised Statutes (HRS).
A. WHO MAY CLAIM THE CREDIT
Only the economic owner of the renewable energy technology system may claim the
credit. The economic owner of the system need not be the owner of the property being served by
the system.
The determination of who is the economic owner of a system is made at the time the
system is installed and placed in service. The economic owner of a system is determined with
reference to the facts and circumstances of the particular transaction. Although no single test
will resolve the question of who the economic owner of the system is in every situation, the
following general rules will be applied by the department when analyzing a transaction:
In the situation of leasing the system or a sale-leaseback of the system, the determination
of the taxpayer who is entitled to the credit requires an analysis of whether the transaction
is, in fact, a lease or sale-leaseback for federal income tax purposes. The characterization
of a transaction involving a system as a sale, lease, or sale-leaseback for federal income
tax purposes determines who is the economic owner of the property and thereby entitled
to the tax benefits associated with the system.
If a transaction is a lease for federal income tax purposes, the lessor is the economic
owner of the system. On the other hand, if the parties characterize a transaction as a
lease, but it is in reality a sale for federal income tax purposes, the lessee is the economic
owner of the system.
If a transaction is a sale-leaseback for federal income tax purposes, the buyer/lessor
entering into a sale-leaseback arrangement with respect to the system is the economic
owner of the system.
If a transaction is a sale for federal income tax purposes, the buyer is the economic owner
of the system, even if title to the system passes to the buyer after the system is technically
installed and placed in service by the seller, but only if the system is installed and placed
in service at the direction of the buyer.
EXHIBIT 1
36. Tax Information Release No. 2007-02
September 17, 2007
Page 2 of 12
Example 1:
A developer on a speculative basis (meaning that the developer is not
contracted to build the home for any specific person) plans to build and
sell 50 homes, which are intended to be used as single-family residences.
The developer plans to install and place in service a photovoltaic system
on each of the residences during the construction of the homes. The
developer is eligible to claim the credit, all other requirements for the
credit being satisfied, if the developer purchases the system and installs
and places it in service. The initial homeowner who then buys one of the
residences from the developer will not be eligible to claim the credit, as
that homeowner was not the economic owner of the system at the time the
system was installed and placed in service.
Example 2:
A homeowner contracts for the purchase and installation of a photovoltaic
system on her single-family residence. Because the installation and
placing in service is contemporaneous with the purchase of the system
being installed, the contractor would not be eligible to claim the credit
even if the contractor originally purchased the system and then installed it
and placed it in service prior to the passing of the title to the system from
the contractor to the homeowner. The homeowner, being the economic
owner of the system, would be the proper taxpayer to claim the credit.
(For discussion regarding application of the appropriate credit cap, see
sections D. and E., below.)
Example 3:
The owner of a hotel purchases a photovoltaic energy system for
installation and use in the hotel. Immediately upon installation of the
system in the hotel, taxpayer acquires the system pursuant to a sale-
leaseback agreement with the hotel owner. Then the taxpayer leases the
system back to the hotel as required for recognition of the transaction as a
valid sale-leaseback transaction for federal income tax purpose. The
taxpayer, not the hotel owner, will be considered the economic owner of
the system when the system was installed and placed in service; and
therefore is eligible to claim the credit.
B. WHEN THE CREDIT MAY BE CLAIMED
The owner of the system may only take this tax credit for a system that has been installed
and placed in service during a taxable year. A renewable energy technology system is placed in
service in the taxable year in which the system is placed in a condition or state of readiness and
available for a specifically assigned function by the taxpayer. Both the installation and
placement in service requirements must be satisfied during a particular tax year in order to claim
the credit for that taxable year. However, not all installation activities must occur within the
same taxable year that the system is ultimately placed in service. As long as any portion of the
installation occurs in the same year that the system is placed in service, all installation costs
incurred by the owner of the system in previous tax years that are related to the system in
37. Tax Information Release No. 2007-02
September 17, 2007
Page 3 of 12
question but not yet used in a claim of this credit due to the "placed in service" requirement, may
be included in the actual cost during the taxable year that both requirements are finally met.
C. WHAT IS A SYSTEM?
The question of what constitutes a system for purposes of this credit continues to cause
uncertainty among taxpayers desiring to take advantage of the tax credit provided at § 235-12.5,
HRS. This question is important because a credit may be claimed for every eligible renewable
energy technology system that is installed and placed in service by a taxpayer during the taxable
year. The credit allowable for each system, however, is subject to a cap; and, therefore, the
question of whether the installation of renewable energy technology constitutes the installation of
one or more systems will directly affect the amount of credit available to a taxpayer.
"Renewable energy technology system" is defined by the statute as "a system that
captures and converts a renewable source of energy, such as wind, heat (solar thermal), or light
(photovoltaic) from the sun into:
(1) A usable source of thermal or mechanical energy;
(2) Electricity; or
(3) Fuel."
§ 235-12.5(b), HRS.
The statute also defines "Solar or wind energy system" as "an identifiable facility,
equipment, apparatus, or the like that converts insolation or wind energy to useful thermal or
electrical energy for heating, cooling, or reducing the use of other types of energy that are
dependent upon fossil fuel for their generation." § 235-12.5(b), HRS. The undefined terms used
in § 235-12.5(a)(1), (2), and (3) (respectively "solar thermal energy systems", "wind-powered
energy systems", and "photovoltaic energy systems") will be defined with reference to the
definition given for "solar or wind energy system." For purposes of this credit, the department
will interpret the terms "solar thermal energy systems", "wind-powered energy systems", and
"photovoltaic energy systems" as follows:
"Solar thermal energy system" means an identifiable facility, equipment,
apparatus, or the like that converts heat (solar thermal) energy to useful thermal or
electrical energy for heating, cooling, or reducing the use of other types of energy
that are dependent upon fossil fuel for their generation.
"Wind-powered energy system" means an identifiable facility, equipment,
apparatus, or the like that converts wind energy to useful thermal or electrical
energy for heating, cooling, or reducing the use of other types of energy that are
dependent upon fossil fuel for their generation.
"Photovoltaic energy system" means an identifiable facility, equipment,
apparatus, or the like that converts light (photovoltaic) energy to useful thermal or
electrical energy for heating, cooling, or reducing the use of other types of energy
that are dependent upon fossil fuel for their generation.
38. Tax Information Release No. 2007-02
September 17, 2007
Page 4 of 12
Therefore, as defined above, "solar thermal energy systems", "wind-powered energy
systems", and "photovoltaic energy systems" are all "renewable energy technology systems" as
that term is defined in § 235-12.5, HRS, because each captures and converts a renewable source
of energy, such as wind, heat (solar thermal), or light (photovoltaic) from the sun into a usable
source of thermal or mechanical energy, electricity, or fuel. As renewable energy technology
systems, a taxpayer who installs and places in service a "solar thermal energy system", a "wind-
powered energy system", or a "photovoltaic energy system" may claim the tax credit.
The key to answering the question of whether any installation of renewable energy
technology constitutes the installation of one or more systems, therefore, depends upon
identifying the facility, equipment, apparatus or the like that is converting insolation or wind
energy into useful thermal or electrical energy for heating, cooling, or reducing the use of other
types of energy that are dependent upon fossil fuel for their generation. A system will only exist
when all the components necessary for the conversion of insolation or wind energy into useful
thermal or electrical energy are present.
Example 4:
Taxpayer installs and places into service three photovoltaic panels/arrays,
one inverter, and associated attachment and connection equipment
sufficient to make one connection to the project site's electrical system.
The taxpayer has installed one system, not three.
Example 5:
Taxpayer installs and places into service three photovoltaic panels/arrays,
three inverters, and associated attachment and connection equipment
sufficient to make three separate, independent connections to the project
site's electrical system. If the taxpayer installs each array to a separate
inverter, which is connected to the project site's electrical system
separately and independently of the other inverter-array combinations, the
taxpayer has installed three systems.
The department interprets the statute's allowance of a credit for a system that is installed
and placed in service by a taxpayer during the taxable year as allowing additions to existing
systems to qualify for the credit in tax years following the year a system is initially placed in
service. However, to be considered an addition, the installation and placing in service of
equipment must be substantial and not constitute mere maintenance or repair of the existing
system. All additions made to one existing system during a single taxable year will be treated as
one installation with the aggregate cost subject to the cap as if a single system were installed and
placed in service during that taxable year. While any number of additions may be made during a
single taxable year, at least one of the additions made during the tax year in question must
constitute or include an identifiable facility, equipment, apparatus, or the like that converts heat
(solar thermal) energy, wind energy, or light (photovoltaic) energy to useful thermal or electrical
energy for heating, cooling, or reducing the use of other types of energy that are dependent upon
fossils fuel for their generation; otherwise none of the additions will generate a credit because the
definition of system will not have been met.
39. Tax Information Release No. 2007-02
September 17, 2007
Page 5 of 12
Example 6:
Taxpayer has an existing photovoltaic system and decides to add an
additional solar panel array in January and then again in November. Since
each solar panel constitutes an identifiable facility, equipment, apparatus,
or the like that converts light (photovoltaic) energy to useful thermal or
electrical energy for heating, cooling, or reducing the use of other types of
energy that are dependent upon fossil fuel for their generation, each
installation will be considered an addition. The two additions will be
treated as a single project and subject to a single cap.
Example 7:
Taxpayer has an existing photovoltaic system and needs to replace one of
the solar panel arrays. In January, taxpayer replaces one array and adds an
additional array. Since the replacement array constitutes maintenance or
repair of the existing system, it does not qualify. However, the cost
reasonably allocated to the installation of the additional array would
qualify for the credit.
Example 8:
Taxpayer has an existing photovoltaic system and needs to replace the
inverter. Since replacing the inverter constitutes maintenance or repair of
the existing system, it does not qualify. Even if the replacement did not
constitute maintenance or repair, it would still not qualify because it is not
an identifiable facility, equipment, apparatus, or the like that converts heat
(solar thermal) energy, wind energy, or light (photovoltaic) energy to
useful thermal or electrical energy for heating, cooling, or reducing the use
of other types of energy that are dependent upon fossils fuel for their
generation. The inverter does not convert light, heat, or wind into useful
thermal or electrical energy, the solar panels do.
Example 9:
Taxpayer has an existing photovoltaic system and decides to add more
solar panel arrays. As a result of adding the solar panel arrays, he needs to
upgrade the inverter and the associated attachment and connection
equipment for a reason other than maintenance or repair. Since the
installation includes solar panels which constitute an identifiable facility,
equipment, apparatus, or the like that converts light (photovoltaic) energy
to useful thermal or electrical energy for heating, cooling, or reducing the
use of other types of energy that are dependent upon fossil fuels for their
generation, the entire cost of installation qualifies.
Example 10:
Taxpayer has an existing photovoltaic system and decides to add more
solar panel arrays in January and December. In September, taxpayer
decides to upgrade the inverter and/or associated attachment and
connection equipment for a reason other than maintenance or repair (for
40. Tax Information Release No. 2007-02
September 17, 2007
Page 6 of 12
example, upgrading to more efficient equipment). The installations made
in January, September, and December will be treated as a single
installation subject to a single cap. Even though the installation in
September does not include an identifiable facility, equipment, apparatus,
or the like that converts heat (solar thermal) energy, wind energy, or light
(photovoltaic) energy to useful thermal or electrical energy for heating,
cooling, or reducing the use of other types of energy that are dependent
upon fossil fuels for their generation, the September installation may be
included in the aggregate actual cost because the January and/or December
additions made during the same tax year do include the installation of an
identifiable facility, equipment, apparatus, or the like that converts light
(photovoltaic) energy to useful thermal or electrical energy for heating,
cooling, or reducing the use of other types of energy that are dependent
upon fossil fuels for their generation.
If the taxpayer in this example did not make either the January or
December addition, then the September addition, by itself, would not
qualify for the credit. To include the cost of installing associated
equipment that does not itself convert heat, wind or light, one of the
additions made during a taxable year must include the installation and
placing in service of an identifiable facility, equipment, apparatus, or the
like that does convert heat (solar thermal) energy, wind energy, or light
(photovoltaic) energy, such as a solar panel.
Example 11:
Calendar year taxpayer has an existing photovoltaic system. In
September, taxpayer decides to upgrade the inverter and/or associated
attachment and connection equipment for a reason other than maintenance
or repair (for example, upgrading to more efficient equipment). As
explained in example 10, taxpayer cannot claim this tax credit for the
installation and placement in service of any equipment that does not
convert heat, wind or light. Taxpayer decides to install an additional solar
panel array in December. As explained in example 10, if taxpayer installs
and places in service equipment that does convert heat, wind or light, then
all additions to the system during the same taxable year will be treated as
one addition, subject to one cap. In this case, the actual cost of the
inverter in the September addition and the solar panel array in the
December addition would be added together and treated as one qualifying
addition during the taxable year, subject to the appropriate cap.
However, if, for purposes of this example 11, the solar panel array
installation begins on December 30 and ends on January 2 of the next
year, then the new solar array panel would be placed in service in the
following tax year. Because the solar panel array was not placed in
service until the next year, it cannot be included as an addition in the same
year as the September inverter addition. Since no equipment that converts
41. Tax Information Release No. 2007-02
September 17, 2007
Page 7 of 12
heat, wind or light was added in the year the inverter was added, the
September inverter addition does not qualify for the credit.
D. Types of Property Served by the System
The question of what constitutes a single-family residential property, multi-family
residential property, and commercial property for purposes of this credit is also causing
uncertainty among taxpayers desiring to take advantage of this tax credit. The maximum credit
allowed for the installation of a renewable energy technology system depends not only upon the
type of system being installed, but also upon the type of property being served by the system.
The statute identifies, but does not define, three categories of property: single-family residential
property, multi-family residential property, and commercial property.
The department begins its interpretation with the term property; the department interprets
property to mean a single, definable portion of the real property located in this State as described
in a title recorded with the Bureau of Conveyances and/or Land Court of the State of Hawaii and
that the applicable law allows to be sold in fee simple separately from any other real property
located in this State.
Once the physical boundaries of the property are determined, a characterization must be
assigned. The department interprets this statute to mean that, for purposes of this tax credit, all
such titled property in the State is to be characterized as commercial or residential, or a mix of
the two. The department further interprets the statute to mean that any property being served by
the renewable energy technology system that cannot be properly characterized as residential or
mixed property will, by default, be characterized as commercial property. Property will be
considered residential or mixed if any portion of the property is being used as a residence. If at
the time of installation and placing in service of the system the property is not occupied, then
property will be considered residential or mixed if any portion of the property is intended for use
as a residence. If property is used to regularly furnish lodging to transients for consideration, in
which the rooms, apartments, suites, or the like are occupied by a transient for less than one
hundred eighty consecutive days for each letting, then the property will be considered
commercial property to the extent of that use.
Example 12:
Same facts as Example 1. Since the unoccupied homes being built by the
developer are intended for use as single-family residences, a claim for the
credit based upon the installation and placing of service of a photovoltaic
system on one of the homes will be subject to the single-family residential
property cap.
Example 13:
Taxpayer leases property to tenants for residential use. Even though the
taxpayer is engaged in the commercial activity of renting property, the
character of the property is determined by its use as a residence. A system
installed and placed in service by the taxpayer for this rental property will
be subject to the single-family or multi-family residential property
limitations.
42. Tax Information Release No. 2007-02
September 17, 2007
Page 8 of 12
Example 14:
A hotel, or any other place in which lodgings are regularly furnished to
transients for consideration, in which all of the rooms, apartments, suites,
or the like are occupied by a transient for less than one hundred eighty
consecutive days for each letting will be considered commercial property.
The number of separate residences located on a single property will determine whether
the property is considered single-family residential property or multi-family residential property.
A single property consisting of more than one residence will be considered multi-family
residential property. The determination that property is multi-family residential property is fact
specific; but, in general and in the absence of other relevant facts to the contrary, multi-family
residential property will be real property that is described in a recorded title and that has more
than one mailing address or separate entrances to separate living areas. However, two
exceptions will be made:
The Ohana House Exception: If a single property has two separate residences,
each occupied by members of a family as defined in the Internal Revenue Code,
§ 267(b)(1), then each residence will be considered a separate single-family
residential property if the system services both residences. Internal Revenue
Code, § 267(b)(1) states that "members of a family" are as defined in subsection
(c)(4). Subsection (c)(4) states that "[t]he family of an individual shall include
only his brothers and sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendents."
The Directed Use Exception: If a system only services one residence on a multi-
family residential property, then the system will be treated as servicing a single-
family residential property.
Example 15:
A taxpayer installs and places in service a renewable energy technology
system that services a building containing 50 condominium units used
commercially and 50 condominium units used as single-family residences.
Each unit is titled separately, therefore, each unit would be considered a
separate property. If the system serviced only one condo unit, the
appropriate property limit would apply, which under the facts of this
example would be either the single-family residential property limit or the
commercial property limit. This is not an example of the Directed Use
Exception.
On the other hand, if the building did not consist of separately titled
condominium units, but instead was an apartment complex with 50
apartment units used commercially and 50 apartment units used as single-
family residences, then a system installed to service just one apartment
unit used as a residence would be subject to the single-family residential
property limit notwithstanding the fact that the apartment unit is part of a
multi-family residential property. This is an example of the Directed Use
43. Tax Information Release No. 2007-02
September 17, 2007
Page 9 of 12
Exception. If the system in this hypothetical involving the apartment
complex serviced two apartment units used as residences instead of one,
then the multi-family residential property limit would apply using only the
number of serviced units, not the total number of units in the entire
apartment complex.
E. Mixed-Use Property versus Multiple Properties
A renewable energy technology system can be installed and placed in service for more
than one property or where a single property is used as a residence and for commercial purposes.
It is important to keep in mind that the treatment of mixed-use property is different than that for a
system servicing multiple properties. In both situations, though, the department requires that the
taxpayer consistently apply a reasonable allocation method, such as square footage or a measure
of use.
In situations where one property has more than one use, the actual cost of the system is
allocated between the residential use (which may be single-family use or multiple-family use)
and the commercial use. Assuming the system in question is a photovoltaic energy system,
thirty-five percent of the cost allocated to residential use is compared against either the single-
family residential cap or the multiple-family residential cap; and thirty-five percent of the cost
allocated to commercial use is compared against the commercial property cap.
Example 16:
Taxpayer has designated one room of her residence for use as a home
office, which is recognized as such by the IRS for federal tax purposes.
For purposes of this tax credit, the property will be considered a mix of
residential and commercial property. If an allocation by square footage is
used and the home office constitutes 5% of the total square footage, then a
$20,000 photovoltaic energy system would result in the following credit:
Single-family residential: The allocated cost is 95% of $20,000, or
$19,000. 35% of the allocated cost ($19,000) is $6,650. Then compare to
the cap for single-family residential property, which is $5,000. The credit
associated with the residential portion of the property is $5,000.
Commercial: The allocated cost is 5% of $20,000, or $1,000. 35% of the
allocated cost ($1,000) is $350. Then compare to the cap for commercial
property, which is $500,000. The credit associated with the commercial
portion of the property is $350.
The total credit for the $20,000 system is the residential portion ($5,000)
plus the commercial portion ($350) for a total credit of $5,350.
Example 17:
Taxpayer is a farmer and has a dwelling and barn on one of her lots.
Following the definition of property set forth in this TIR, the particular lot
containing both the dwelling and the barn would be considered a mixed-
use property. If taxpayer installs and places in service a renewable energy
44. Tax Information Release No. 2007-02
September 17, 2007
Page 10 of 12
technology system that only services the barn, then an allocation by use
would result in the system subject only to the commercial property
limitations. (Note: This is not an example of the directed use exception
discussed above; an allocation would still be made, but it would be a 0%
residential/100% commercial allocation based upon use.) Likewise, if the
system only serviced the single-family dwelling, then an allocation by use
would result in the system subject only to the single-family residential
property limitations. If the system serviced both the barn and the
dwelling, then a portion of the system's actual cost would be subject to the
commercial property limitations and the rest would be subject to the
single-family residential property limitations.
Example 18:
Taxpayer installs and places into service a renewable energy technology
system for an apartment complex that contains both residential and
commercial units. Each unit is not separately titled, so each unit would
not be treated as separate property. Instead, the titled property is the entire
apartment complex. Since the titled property is mixed-use, the taxpayer
will have to reasonably allocate the actual cost of the system between the
residential and commercial uses of the property. Assuming 50 residential
apartment units and 10 commercial units of equal size and use, and a
$600,000 photovoltaic energy system, the credit would be calculated as
follows:
Allocation of cost: The actual cost of $600,000 would be divided
between residential use of the property and the commercial use of the
property, allocating $500,000 to the residential use and $100,000 to the
commercial use.
Residential Use: Since the property contains more than one residence, the
proper characterization of this use is multi-family residential. In this case,
thirty-five percent of $500,000, or $175,000, would be compared against
the $350 per unit multi-family residential property cap, or $17,500. Under
the facts of this example, the multi-family residential use of the property
would generate a $17,500 credit (50 units times $350).
Commercial Use: In this case, thirty-five percent of $100,000, or $35,000,
would be compared against the $500,000 commercial property cap. Under
the facts of this example, the commercial use of the property would
generate a $35,000 credit.
The total credit for the $600,000 photovoltaic energy system is $52,500.
A different calculation is required for a system that services more than one property. As
with a mixed-use property, the actual cost of a single system servicing multiple properties is
allocated among the properties. The difference lies with the application of the cap. With a
45. Tax Information Release No. 2007-02
September 17, 2007
Page 11 of 12
mixed-use property, the cap is applied once to each use since it is a single property. With
multiple properties, the appropriate cap is applied for each separate property.
Example 19:
Taxpayer installs and places into service a wind farm that services one
community of 50 single-family homes and 10 separate commercial
properties. Assuming that each property is equal in size and use, the
allocation of the actual cost would be made equally to each property. If a
$600,000 wind-powered system were installed and placed in service for
these properties, the credit would be calculated as follows:
Allocation of cost: The actual cost of $600,000 would be divided equally
among the properties, allocating $10,000 to each property.
Single-family residential: Each single-family residential property would
be treated independently. In each case, twenty percent of $10,000, or
$2,000, would be compared against the $1,500 single-family residential
property cap. Under the facts of this example, each single-family
residential property would generate a $1,500 credit, for a total of $75,000
(50 properties times $1,500).
Commercial: Each commercial property would be treated independently.
In each case, twenty percent of $10,000, or $2,000, would be compared
against the $500,000 commercial property cap. Under the facts of this
example, each commercial property would generate a $2,000 credit, for a
total of $20,000 (10 properties times $2,000).
The total credit for the $600,000 wind-powered system is $1,500 for each
single-family residential property ($75,000) plus $2,000 for each
commercial property ($20,000) for a total credit of $95,000.
Example 20:
Unlike Example 19, Taxpayer (for example, an independent energy
provider or the local electricity provider) installs and places into service a
wind farm that does not service any particular property, but is entirely
directed into the energy grid of the local electricity provider. The
renewable energy technology system will be considered to be servicing
commercial property only; no allocation is necessary.
However, if an identifiable connection exists to any particular property in
addition to a connection to the energy grid of the local electricity provider,
then the cost of the system must be allocated among and between the
particular property or properties being serviced and the connection to the
energy grid, which is treated as servicing a single commercial property.
46. Tax Information Release No. 2007-02
September 17, 2007
Page 12 of 12
Example 21:
Taxpayer installs and places into service a renewable energy technology
system for a condominium that contains both residential and commercial
units. Each condominium unit has a separate title, so each unit would be
treated as a separate property. The taxpayer will have to reasonably
allocate the actual cost of the system between the residential and
commercial properties. Assuming 50 single-family condominium units
and 10 commercial units of equal size and use, and a $600,000
photovoltaic energy system, the credit would be calculated as follows:
Allocation of cost: The actual cost of $600,000 would be divided equally
among the properties, allocating $10,000 to each property.
Single-family residential: Each single-family residential condo unit would
be treated independently. In each case, thirty-five percent of $10,000, or
$3,500, would be compared against the $5,000 single-family residential
property cap. Under the facts of this example, each single-family
residential property would generate a $3,500 credit, for a total of $175,000
(50 units times $3,500).
Commercial: Each commercial condo unit would be treated
independently. In each case, thirty-five percent of $10,000, or $3,500,
would be compared against the $500,000 commercial property cap. Under
the facts of this example, each commercial property would generate a
$3,500 credit, for a total of $35,000 (10 properties times $3,500).
The total credit for the $600,000 photovoltaic energy system is $3,500 for
each single-family condo unit ($175,000) plus $3,500 for each commercial
condo unit ($35,000) for a total credit of $210,000.
For more information, please contact Jason P. Healey, Administrative Rules Specialist at
(808) 587-1562 or the Rules Office at (808) 587-1577.
Kurt Kawafuchi
Director of Taxation
HRS Sections Explained: HRS § 235-12.5.
47. LINDA LINGLE KURT KAWAFUCHI
GOVERNOR DIRECTOR OF TAXATION
JAMES R. AIONA, JR. STANLEY SHIRAKI
LT. GOVERNOR DEPUTY DIRECTOR
STATE OF HAWAII
DEPARTMENT OF TAXATION
P.O. BOX 259
HONOLULU, HAWAII 96809
PHONE NO: (808) 587-1510
FAX NO: (808) 587-1560
May 3, 2010
TAX INFORMATION RELEASE NO. 2010-02
Re: Further guidance regarding the term "system" for purposes of the Renewable Energy
Technologies Income Tax Credit, HRS § 235-12.5.
The purpose of this Tax Information Release (TIR) is to provide additional guidance on the
Department of Taxation's (Department) interpretation of the term "system" for purposes of the
Renewable Energy Technologies Income Tax Credit set forth at Section 235-12.5, Hawaii Revised
Statutes (HRS) (hereinafter "credit"). Due to technological advances in photovoltaic renewable
energy system technology, it is necessary for the Department to restate its position and provide
additional interpretation.
TIR 2007-02 AND DETERMING THE NUMBER OF SYSTEMS
In TIR 2007-02, the Department analyzed how to determine the number of systems for
purposes of calculating the credit amount:
The key to answer the question of whether any installation of renewable energy
technology constitutes the installation of one or more systems...depends upon
identifying the facility, equipment, apparatus or the like that is converting
insolation...into useful thermal or electrical energy for heating, cooling, or reducing
the use of other types of energy that are dependent upon fossil fuel for their
generation. A system will only exist when all the components necessary for the
conversion of insolation...into useful thermal or electrical energy are present.
Discerning a "system" for purposes of the credit is important because the credit's cap applies per
system. Therefore, if a taxpayer installs more than one system on a property, more than one credit
cap may be applicable depending upon the facts and circumstances of a particular case.
TIR 2007-02 went on to provide two examples of photovoltaic systems, distinguishing
whether more than one system was installed for purposes of the credit:
EXHIBIT 2
48. Tax Information Release No. 2010-02
May 3, 2010
Page 2 of 6
Example 4:
Taxpayer installs and places into service three photovoltaic panels/arrays,
one inverter, and associated attachment and connection equipment sufficient
to make one connection to the project site's electrical system. The taxpayer
has installed one system, not three.
Example 5:
Taxpayer installs and places into service three photovoltaic panels/arrays,
three inverters, and associated attachment and connection equipment
sufficient to make three separate, independent connections to the project
site's electrical system. If the taxpayer installs each array to a separate
inverter, which is connected to the project site's electrical system separately
and independently of the other inverter-array combinations, the taxpayer has
installed three systems.
(emphasis added).
THE INVERTER ALONE DOES NOT DICTATE THE NUMBER OF SYSTEMS
The Department has learned that the photovoltaic industry, taxpayers, and tax practitioners
have interpreted the foregoing discussion contained in TIR 2007-02 to mean that a "system," for
purposes of determining the credit cap, is based upon the number of inverters installed on a project.
The number of inverters alone does not dictate the number of systems eligible for
independent credit caps. TIR 2007-02 defines a system based upon the number of independent
functioning connections to the electrical system——not the number of inverters.
The Department is clarifying TIR 2007-02 to curb perceived abuse in the credit's application
per system as the credit applies to photovoltaic technology systems that use micro-inverters. The
Department understands that the use of micro-inverters in single-family residential home
applications has become more common. Because of the volume of single-family residential tax
credit claims, it is important that the Department advise industry participants, taxpayers, and tax
practitioners to avoid unnecessary controversy or dispute.
A. Micro-inverters vs. Central or String Inverters——Distinction
A micro-inverter is a device that converts the direct current (DC) produced from a single
solar panel module to alternating current (AC). A central or string inverter, on the other hand,
aggregates all DC current from an entire photovoltaic system and converts that DC power from the
entire array into AC power. The main distinction between the micro-inverter and the central or
string inverter is that there is typically a single micro-inverter for each solar panel in a system
utilizing micro-inverters, thus eliminating the need for a central inverter. A system utilizing the
central or string inverter contains one inverter per solar panel array,1
converting the entire array's DC
power into AC power at one common point. From an electrical engineering standpoint, a central or
string inverter system is connected in series. A micro-inverter system is connected in parallel.
1
An array is a grouping of solar panels.
49. Tax Information Release No. 2010-02
May 3, 2010
Page 3 of 6
B. Micro-inverters vs. Central or String Inverters——Relevance in Application of the
Credit
As stated above, the Department has learned that many persons involved in photovoltaic
systems have attempted to claim the credit based upon the number of inverters. Assuming the
number of inverters is the test to determine the number of systems, a photovoltaic system on an
ordinary single-family residential house using micro-inverters could potentially have 20 systems,
assuming there are 20 panels and 20 micro-inverters. However, the same sized system on the same
house using a single central or string inverter would only constitute one system.
If the number of inverters is the proper test for determining a system for purpose of the credit
cap, a comparable system of equal size as demonstrated above would result in radically different
credit claims——a claim with 20 caps for the system containing micro-inverters and a claim with one
cap for the system with a central inverter. Because of the radically differing results, for which there
is no basis for differentiation as a matter of tax law, the Department reminds taxpayers, tax
practitioners, and industry participants that the number of inverters does not dictate the number of
systems.
The Department will be pursuing and challenging any claims made by micro-inverter system
owners who have claimed that the credit's cap is based upon the number of micro-inverters.
THE NUMBER OF CONNECTIONS TO THE ELECTRICAL SYSTEM IS THE PROPER
TEST
For purposes of determining the number of systems associated with any property, the proper
test under TIR 2007-02 is the number of independent connections to the project site's electrical
system. The number of independent electrical connections may be equal to the number of inverters,
or it may not. Ordinarily, on a system involving central or string inverters, the number of inverters
involved will be equal to the number of systems because each central inverter will have its own
independent function as it relates to the connection into the electrical system. However, on a system
utilizing micro-inverters, ordinarily the number of systems will not equal the number of inverters
because a micro-inverter system wired in parallel ordinarily only has one independent connection to
the project's electrical system.
In order to determine the number of connections to the project site's electrical system, the
Department will look to the number of independent connections into a final utility metering device
or circuit breaker. It is possible for a single project site to have more than one point of connection
into a final utility metering device or circuit breaker.
Example 1:
Taxpayer installs and places into service three photovoltaic panels, with a micro-inverter
attached to each panel for a total of three inverters, and associated attachment and
connection equipment sufficient to make a single connection into the single family home's
circuit breaker. The taxpayer has installed one system, not three.
50. Tax Information Release No. 2010-02
May 3, 2010
Page 4 of 6
Example 2:
Same facts as Example 1, except the system includes one central inverter and no micro-
inverters. The taxpayer has installed one system.
Example 3:
Taxpayer installs and places into service ten photovoltaic panels, with a micro-
inverter attached to each panel for a total of ten inverters, and associated attachment
and connection equipment sufficient to make two independent connections into the
single family home's two independent circuit breaker panels. One circuit breaker
panel is for the home's main electric system. The other panel is located in the garage
and is used to control the power for the home's swimming pool and sprinkler system.
The taxpayer has installed two systems because there are two independent
connections to the project site's electrical system.
Example 4:
Same facts as Example 3, except the system includes two central inverters for
aggregation of DC power to each separate panel and no micro-inverters. The
taxpayer has installed two systems.
TAX MOTIVATED INSTALLATIONS WILL BE DISREGARDED
The only connections to a project site's electric connection that will qualify as independent
separate systems are those electrical connections that have a legitimate purpose and are not tax
motivated.
For example, if a taxpayer foregoes a junction box or other device used to reduce multiple
connections into a single connection for purposes of connecting to the circuit breaker so that the
taxpayer can create multiple connections to increase the number of credit caps, such installation will
be considered tax motivated, a sham, and will be challenged by the Department. Where multiple
systems are claimed and are subsequently found to be a sham by the Department, only one system
will be allowed.
The Department reserves the right to inspect any installation resulting in more than one
system per project site to ensure that the number of systems is legitimate and not abusive.
Example 5:
Taxpayer installs and places into service 20 photovoltaic panels, with a micro-
inverter attached to each panel for a total of 20 inverters, and associated attachment
and connection equipment. Assume further that a similar system ordinarily includes
a junction box to reduce the 20 connections from the individual panels into a single
connection for easy installation into the circuit breaker. In order to increase the
51. Tax Information Release No. 2010-02
May 3, 2010
Page 5 of 6
number of credit caps, the taxpayer requested that the installation include 20 separate
connections to the circuit breaker, bypassing the junction box. Assume further that
there is no independent nontax reason for 20 separate connections to the circuit
breaker. This installation would be considered abusive by the Department and the
Department would disallow any claim involving more than one system. One system
would be allowed.
The same analysis in Example 5 would apply to multiple use of central or string inverters with
multiple connections to the electrical system that lack a legitimate nontax purpose.
Examples of legitimate nontax reasons for multiple connections to an electrical system
include:
Separate independent circuit breakers located at the same project site;
Separate independent utility metering devices located at the same project site;
System capacity or load capacity of equipment;
Utilizing multiple connections to independently power separate devices or for separate uses
(i.e., one system to power air conditioning and another system for net metering);
Any other legitimate nontax reason certified by an electrical engineer in writing and signed
under penalties of perjury containing the following affirmation——
““I declare, under the penalties set forth in section 231-36, HRS, that this statement (including any
diagrams or supporting documentation) has been examined by me and, to the best of my knowledge
and belief, is a true, correct, and complete statement of the facts as they relate to this certification,
made in good faith, pursuant to Hawaii Income Tax Law, Chapter 235, HRS.””
Ultimately, whether or not a connection is abusive or outside the Department's interpretation
of a separate independent system is made on a case-by-case basis.
TEMPORARY AMNESTY/PENALTY WAIVER FOR THOSE CLAIMING ABUSIVE
CREDITS
The Department will be pursuing all taxpayers who have claimed more than one system to
determine whether such claims are in accord with this TIR. It is the Department's position that the
positions taken in TIR 2007-02 are clear and that the proper test to determine a system is
independent connections——not the number of inverters. The Department understands that industry
participants who sell or install photovoltaic systems have advised customers and clients to the
contrary and that the number of inverters is the proper approach. The Department believes that
industry participants who have advocated these positions have potentially participated in the
promotion of an abusive tax shelter within the meaning of HRS § 231-36.7. A person who is found
to have promoted an abusive tax shelter within the meaning of HRS § 231-36.7 may be subject to a
penalty of $1,000 per shelter or could be prohibited from further promoting the underlying
transaction, in this case the promotion of Hawaii tax incentives.
The Department will be vigorously pursuing those who have abused the renewable energy
credit, including market participants who have violated Hawaii tax shelter or other laws. In
52. Tax Information Release No. 2010-02
May 3, 2010
Page 6 of 6
furtherance of the Department's tax compliance efforts, the Department will be approaching industry
participants to obtain customer lists and other information about those who have had multiple
systems installed on their premises.
Notwithstanding the foregoing, the Department strongly encourages voluntary compliance
with the tax laws. Beginning immediately, taxpayers will be allowed to submit amended returns
adjusting credit claims to conform to the positions in this TIR and TIR 2007-02. If a taxpayer
submits amended tax returns by June 30, 2010 correcting any erroneous refund claims, all penalties
associated with abusive claims will be waived. Amended tax returns reflecting adjustments to
renewable energy credits should include the marking "ENERGY CREDIT AMNESTY" on the top
of the return. The Department reminds taxpayers that penalties are assessable for substantial
understatements, erroneous refund claims, as well as negligence in tax positions that are contrary to
express guidance. The Department will be assessing the 20% erroneous refund claim on all abusive
claims starting July 1, 2010.
Moreover, the Department will waive the tax shelter promoter penalty for those industry
participants that fully cooperate with the Department's investigation into customer lists and other
information regarding the renewable energy system plans offered for sale.
IMPACT ON ADDITIONS TO EXISTING SYSTEMS
This TIR is not intended to impact the Department's interpretation or analysis of allowing a
separate credit claim for additions to an existing system, as discussed in TIR 2007-02. In order for
additions to existing systems to qualify for the credit, the installation and placing in service of
equipment must be substantial and not constitute mere maintenance or repair of the existing system.
EFFECTIVE DATE
This TIR is effective immediately and applies to any system placed in service prior to its
effective date where the statute of limitations for assessment or refund remains open.
For additional information regarding this TIR, please call (808) 587-1577.
KURT KAWAFUCHI
Director of Taxation
HRS Sections Explained: HRS § 235-12.5
53. LINDA LINGLE KURT KAWAFUCHI
GOVERNOR DIRECTOR OF TAXATION
JAMES R. AIONA, JR. STANLEY SHIRAKI
LT. GOVERNOR DEPUTY DIRECTOR
STATE OF HAWAII
DEPARTMENT OF TAXATION
P.O. BOX 259
HONOLULU, HAWAII 96809
PHONE NO: (808) 587-1510
FAX NO: (808) 587-1560
TAX INFORMATION RELEASE NO. 2010-03
May 21, 2010
Re: Further technical clarification regarding the term "system" for purposes of the
Renewable Energy Technologies Income Tax Credit, HRS § 235-12.5
The purpose of this Tax Information Release (TIR) is to provide additional guidance on the
Department of Taxation's (Department) interpretation of the term "system" for the purposes of the
Renewable Energy Technologies Income Tax Credit set forth at Section 235-12.5, Hawaii Revised
Statutes (HRS).
In prior TIRs on this subject, the Department clarified that qualified renewable energy
technology systems:
(a) must be fully integrated (i.e. must incorporate all components necessary to convert a
renewable energy source into useful thermal or electrical energy) (see TIR2007-02at
page 4);
(b) must have an independent connection into a project site's electrical system (i.e. a
final utility metering device, circuit breaker or other overcurrent protection device1
(see TIR 2010-02 at page 3).
Beyond providing further guidance regarding the term "system," the Department sought in
TIR 2010-02 to address its concerns that in some instances, persons involved in the installation of
photovoltaic systems were not adhering to one or both of the above principles. Instead, some
persons improperly relied upon changes in system component technology (in particular, the
availability of "micro-inverters") to overstate the number of systems for which credits may be
claimed. TIR 2010-02 at page three discusses how a single micro-inverter, attached to a single solar
panel, could be inappropriately characterized as a separate system. In an effort to prevent the
manipulation of system design solely for tax purposes, the Department set forth five hypothetical
examples to provide guidance on the design of legitimate systems.
1
Per National Electric Code 2008 240.2 (treatment of overcurrent protection devices).
EXHIBIT 3
54. Tax Information Release No. 2010-03
May 21, 2010
Page 2 of 4
Upon further consideration and review, the Department believes additional guidance is
necessary regarding what constitutes a legitimate, fully integrated and independent system to
provide greater clarity and certainty for industry participants, taxpayers and tax practitioners. In this
case, and in the case of all such guidance, the Department’s intent is to provide standards that can be
relied upon by tax practitioners.
As noted above and in the earlier TIR’s, the number of inverters alone cannot be used to
determine the number of systems for the purpose of computing the cap. The number of independent
connections into the building’s electrical system is the determining factor, as illustrated by the
following examples:
Example 1:
Taxpayer installs and places into service ten photovoltaic panels, with a micro-inverter
attached to each panel for a total of ten inverters, and associated attachment and connection
equipment sufficient to make a single connection into a circuit breaker in the main
distribution panel or a subordinate PV system output panel or other code compliant
connection method used in the electrical system of a single-family home. The taxpayer has
installed one system, not ten.
Example 2:
Taxpayer installs and places into service twenty photovoltaic panels, with a micro-inverter
attached to each panel for a total of twenty inverters, and associated attachment and
connection equipment sufficient to make two connections into two circuit breakers in the
main distribution panel or a subordinate PV system output panel or other code compliant
connection method used in the electrical system of a single-family home. The taxpayer has
installed two systems, not twenty.
Example 3:
Taxpayer installs and places into service ten photovoltaic panels, with a micro-inverter
attached to each panel for a total of ten inverters, and associated attachment and connection
equipment sufficient to make ten independent connections into ten circuit breakers in the
main distribution panel of a single-family home. Assume further that there is no independent
nontax reason for the ten separate connections to the ten independent circuit breakers. The
taxpayer has installed one system, not ten.
Example 4:
Taxpayer installs and places into service twenty photovoltaic panels, with a micro-inverter
attached to each panel for a total of twenty inverters, and associated attachment and
connection equipment sufficient to make a connection into a circuit breaker in each of two
circuit breaker panels in a home with two such panels (for example, a main distribution panel
and a subordinate panel used to control a swimming pool). The taxpayer has installed two
systems, not twenty.
55. Tax Information Release No. 2010-03
May 21, 2010
Page 3 of 4
Note that in Example 2, the PV Installation is classified by the Department as having been
appropriately divided into two systems for legitimate nontax reasons by virtue of the fact that
microinverter manufacturers explicitly specify a maximum number of modules that can be wired in
parallel in a single circuit (i.e., into a single overcurrent protection device) for each microinverter
model to reduce the risk of fire, electrocution, and to prevent damage to the equipment. Therefore,
the design specifications of the system determine the need for multiple connections to the electrical
system, and the number of connections has not been determined by tax concerns.
The Department’s guidance has been clear and consistent across the three TIR’s.
From TIR 2007-02, Example 5 (page 4) reads:
Taxpayer installs and places into service three photovoltaic panels/arrays, three inverters,
and associated attachment and connection equipment sufficient to make three separate,
independent connections to the project site’s electrical system. If the taxpayer installs each
array to a separate inverter, which is connected to the project site’s electrical system
separately and independently of the other inverter-array combinations, the taxpayer has
installed three systems.
This guidance was reaffirmed in the Department’s Letter Ruling 2010-05 (dated March 25,
2010) in footnote two on page two, where it states:
The proper test for determining the number of systems under TIR 2007-02 is the number of
independent connections to the project site’s electrical system – not the number of central or
string inverters. The number of independent electrical connections may be equal to the
number of central or string inverters, or it may not. Ordinarily, on a system involving central
or string inverters, the number of inverters involved will be equal to the number of systems
because each central or string inverter will have its own independent connection to the
electrical system.”
This language is also repeated verbatim in the Department’s guidance in TIR 2010-02 (see
page 3). TIR 2010-02 goes on to articulate a partial list of legitimate non-tax purposes for multiple
connections to electrical systems on page 5.
The following examples further clarify the appropriate use of central or string inverters for
nontax reasons:
Example 5:
Taxpayer installs and places into service twelve photovoltaic panels, attached to a single
6,000 watt central or string inverter, along with associated attachment and connection
equipment. The output from the inverter is then connected to a single circuit breaker in the
main distribution panel or a subordinate PV system output panel or other code compliant
connection method used in the electrical system. The taxpayer has installed one system.
56. Tax Information Release No. 2010-03
May 21, 2010
Page 4 of 4
Example 6:
Taxpayer installs and places into service twelve photovoltaic panels, attached to two 3,000
watt central or string inverters, along with associated attachment and connection equipment.
The output from each inverter is then connected to a unique circuit breaker in the main
distribution panel or a subordinate PV system output panel or other code compliant
connection method used in the electrical system. The taxpayer has installed two systems.
Example 7:
A single taxpayer installs and places into service a PV project on a single rooftop of a
facility with two utility meters, one for the main load and another to handle a refrigeration
load. Half of the project is wired into the electrical system attached to one utility meter and
half of the project is wired into the electrical system associated with the other utility meter.
The taxpayer has installed two systems not one.
The design basis for different central or string inverter combinations can be driven by many
factors including but not limited to Maximum Power Point Tracking, multiple roof planes, shading,
future system expansion, increased inverter efficiency, utility interconnection requirements, and
maximizing production of renewable energy (for instance, the systems in Example 6 above will yield
more renewable energy over time than the single system in Example 5). Legitimate design
motivations, including but not limited to those listed above will not be considered to be "tax
motivated."
For additional information regarding this TIR, please call (808) 587-1577.
KURT KAWAFUCHI
Director of Taxation
HRS Sections Explained: HRS Section 235-12.5
143. EVOLVING HAWAI`I’S SOLAR TAX CREDIT:
Preserving Long-Term Prosperity while Avoiding Short-Term Disaster
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The Hawai`i PV industry has grown over a few short years from a small niche industry to become one of the
bright spots of economic growth in the State. From a handful of companies with a dozen or two employees
each, the industry has grown to employ an estimated 5,000 people in the State. Solar projects now comprise
23% of all construction activity in Hawai`i. And, PV enjoys immense popularity among the people of
Hawai`i, who see it as both a symbol of the State’s commitment to ward renewable energy and away from its
oil dependency, and as a way for cash-strapped households to help manage their ever-growing electricity bills.
The growth of the industry has not come without a cost to the State budget, and that cost has been increasing
as the industry grows (though not as rapidly as the industry is growing because the installed cost of PV
projects has been in steady decline since 2008). Meanwhile, some have charged that the State tax credit is
being abused as some installers and system owners allegedly claiming credits worth more than they are
entitled to under the law. While solid economic analysis has repeatedly demonstrated that the state tax credit
is a resoundingly good financial deal for the State treasury—returning over $2.60 in direct additional tax
revenue for every credit dollar spent, and providing the State with a strong financial return of 10.8% per year
over the 30 year life of the systems—the rapid growth in immediate costs to the State budget and the
allegations of abuse have raised questions about the wisdom of continuing the credit in its present form.
Changing the State tax credit offers both great opportunity and great danger: If done wisely, the credit can be
evolved in a way to mitigate and manage the impact on the State budget while at the same time creating a
path for the booming industry to evolve beyond the need for credits while solidifying its place as a critical,
long-term component of the State’s economy. If done poorly and precipitously, however, changing the credit
could lead to the almost immediate layoff of thousands of workers, many Hawaii-owned businesses going
bankrupt, and the State and its residents experiencing a major setback in their efforts to move toward energy
independence.
This White Paper addresses the current role of the PV industry in the State’s economy; the significance of the
State tax credit in creating and maintaining that role; the impacts of potential changes to the credit; and
proposes means by which the credit can be evolved without highly disruptive and potentially disastrous side
effects on the State’s employment picture. Finally, the paper offers suggestions for managing fraud and abuse
of the tax credit.
Alternative Futures: Employment Levels in Hawai`i’s PV Industry
EXHIBIT 18
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Industry data indicates that the total size of the solar PV industry in Hawai`i
in 2012 is about $450 million in revenue,1 and accounts for about 5,000 jobs,
including about 23% of all construction jobs.2 The Hawai`i PV industry can
be broken down into several market “segments,” each of which is affected
somewhat differently by the solar tax credit. Industry data suggests that the
current Hawai`i PV market volumes and jobs breakdown looks something
like this:
"1] Job estimates are based on DBEDT input/output macroeconomic model multiplier of 11.1 jobs/$1 million of activity for the
construction sector.
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Between one-quarter and one-half of the cost of most PV installation is attributable to labor, all of which
money remains in Hawai`i to circulate in the local economy. The balance of the costs are for system
components, essentially all of are produced outside of Hawai`i. A recent update by University of Hawai`i
economist Dr. Thomas Loudat of his 2002 Energy Efficiency Policy Task Report to the Hawai`i Legislature
showed the following benefits to the Hawai`i economy:
Source: BluePlanetFoundation.org/SolarCredit
PV industry impact goes well beyond the direct employment of contractors on rooftops installing PV. Each
PV project requires sales staff, administrators, accountants, designers, electrical engineers, roofers, lawyers,
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'&Figures supplied by the Department of Business, Economic Development and Tourism (DBEDT) to the Council on
Revenues in August 2012 suggest that the total industry size is about $775 million. That analysis is based on several
flawed assumptions, as discussed further below.&
+&Source: DBEDT analysis of data from closed building permits for solar PV as a proportion of all closed building
permits.
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transportation workers, project managers in the private sector, plus building permit analysts and inspectors,
utility engineers and staff, and other trades.
In addition to jobs, the PV industry is a major source of new capital coming into the State. Of every dollar
spent on PV projects in Hawai`i, over 708 of it comes from private investors outside of Hawai`i and from the
Federal government.3 Outside investment into the State grows our economy and our Gross State Product.
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It is important to remember that the solar tax credit was created by the Legislature in 2002 to help the State
reduce its dependency on imported oil and grow a stronger local economy while enhancing and protecting
our unique and important pristine environment. It was not created as a stimulus for any particular industry or
business segment and as such is not akin to Hawaii’s much-discussed High Technology Tax Credit.
Accordingly, when analyzing the state tax credit, it is important to keep it in the larger context of Hawai`i
exporting $4 billion to $6 billion per year on fossil fuels, with no control over costs or availability of that
resource, and commensurate vulnerability to both price spikes and supply disruptions. Hawai`i’s
expenditures on energy as a percentage of Gross Domestic Product are currently at an all-time high:
The state solar tax credit has played an important part in Hawai`i growing its solar PV basis to rank third in
the nation for installed PV per capita, and for Hawai`i’s utilities to occupy four of the top five spots in a
ranking of installed solar systems per customer.4 Currently, approximately ___% of Hawai`i’s electricity
comes from solar PV, up from almost nothing over the past five years, and which undeniably could not have
occurred without the state solar tax credit.
The solar tax credit currently supplies about 23% of the cost of any given solar PV system installed in the
State. The importance of the state credit varies according to two major factors: 1) industry segment and 2)
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,&DBEDT estimates that the Hawai`i tax credit is actually claimed at a rate of only about 23% of total project costs. See
DBEDT report to Council on Revenues, August 2012. This is because a significant portion of the claims for the 35% tax
credit are made via application for the cash refund, which is only 24.5% of project costs. In addition, a material
proportion of taxpayers entitled to the credit either fail to claim it, or claim it over several years, reducing the net present
cost to the State.&
-&Sources: 2011 U.S. Solar Market Trends, August 2012; 2011 SEPA Utility Rankings, May 2012 (SEPA).
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proportion of systems financed by third-party investors, as opposed to being paid for by the “host” who use
the energy produced by the PV system.
Estimated Size and Segmentation of Hawaii’s PV Market
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Industry segmentation is significant to any discussion of efforts to adjust the solar credit because it
determines the sensitivity of the project’s financial viability to changes in the incentive structure and also
determines the amount of time required to complete a project, from initial concept to final utility
interconnection. For example, homeowners and commercial system owners installing a PV systems to reduce
their own electrical usage will be somewhat less sensitive to incentive adjustments than third party financiers
of residential, commercial, feed-in tariff, and utility scale PV systems, who must meet the return requirements
of their investors. Similarly, whereas environmental motivations may influence investment decisions for
homeowners and business owners, for financiers solar projects are competing only with alternative
investment options, reducing these projects’ ability to absorb changes in the incentive environment.
Understanding the extent to which a market segment is third-party financed is also important because the
economic motivations that permit the systems to be purchased and paid for are driven entirely by investors
looking at economic risk/return, so the impact of a change in the solar credit on residential property will have
different implications to those third-party financing suppliers for residential solar (i.e., residential solar lessors)
than they will to the homeowners who will be using the energy.
Another important aspect of the solar tax credit for third party financing is the degree of stability and
predictability in availability of the incentive. Financing involving tax credits is highly complex and there are a
limited number of suppliers of that financing. In addition, successful completion of a financed project
requires long planning and development cycles, during which significant money and other resources are spent
in anticipation of receiving a promised benefit from the incentive. Development cycles vary by market
segment:
Accordingly, abrupt changes that are implemented with less notice than the development cycle time and
which do not provide some sort of ‘grandfathering’ for projects already committed can cause huge
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disruptions in the marketplace, resulting in projects being cancelled, workers being laid off, and businesses
failing.
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There are a range of potential changes to the state solar credit, as well as a range of ways those could be
implemented. This White Paper considers the two that seem to be principally under discussion:
1) A change in rules implemented by the State Department of Taxation which would limit the tax credit
to the statutory cap amount on a TMK basis, and which would be effective for systems placed into
service on or after January 1, 2013 (the “DoTax Rule Change”).
2) A change to the tax credit statute by the Legislature during the 2013 session that would roll the tax
credit back in steps from 35% to 25% to 20% and possibly continuing in steps until the credit is
eliminated, and implemented for projects put in service in 2014 and after (the “Legislative Phase-
Out”).
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The following chart discusses likely impacts of the DoTax rule changes by market segment over time, and can
best be understood when read vertically column by column:
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This section estimates these same market-segment figures under an incentive reduced from 35 to 25 percent
for the baseline non-refundable credit (24.5 to 17.5 percent for the refundable credit), as proposed in last
Session’s HB2417 Proposed CD1 from the 2012 Legislature.
Key findings are as follows:
• Total solar market dollar volume for 2014 declines under reduced subsidy from $530 million to $374
million.
• General fund (“GF”) expenditures for 2014 decline from $142.9 million to $71.8 million – a savings
of $71.1 million or roughly half of the total.
It is important to note that additional GF savings of about $__ million can be achieved by legislative action to
replace the current income tax credit for utility scale projects with a production tax credit (PTC).5
Leaving aside the gains that could be accomplished by switching utility scale from an investment-based to a
production-based tax credit, the primary drivers of the GF savings are (1) reductions in market activity of
varying amounts and (2) shifts between the non-refundable to the refundable credits in each of the market
segments. The remainder of this document examines each market segment and explains the dynamics that
result in these changes.
Estimated Market Volume and General Fund Obligation under Existing and Proposed Systems (all
numbers in millions)
Residential Rooftop
Commercial
<250 kW
Rooftop
Commercial
>250 kW
FIT
Ground
Mount
<500 kW
Utility
Scale
PPAs and
Tier 3
FIT
Total
2014: Current Credit
Estimated Volume $200 $40 $40 $125 $125 $530
Share Claiming Refundable
Credit 50% 50% 90% 100% 100%
Est. 2014 Credit Cost $59.5 $11.9 $10.2 $30.6 $30.6 $142.9
2014: Proposed Credit
Estimated Volume $160 $34 $30 $88 $63 $374
Refundable Share (24.5%) 60% 50% 90% 100% 100%
Est. 2014 Credit Cost $32.8 $7.2 $5.5 $15.3 $10.9 $71.8
Market volume impact of change
in incentive
(Percentage point change) -20% -15% -25% -30% -50%
Savings under Proposed
Changes $26.7 $4.7 $4.7 $15.3 $19.7 $71.1
Residential Market Impacts: $26.7 million GF Savings
The residential market will experience two primary effects from the changes to the credit: An estimated 20
percent reduction in volume due to the reduced incentive, and a shift in the preferred financing mechanism.
The reduction in demand would lower residential market volume by an estimated $40 million. The reduced
incentive will also shift the market more toward a lease financing product because of lower out-of-pocket
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&
5 This change was part of the compromise version of HB2417 (proposed CD1) that was supported by the House,
Senate, DoTax and the solar industry that failed to meet the final deadline in the 2012 legislative session.
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savings to homeowners from directly purchasing systems.6 This affects total expenditures because leases use
the refundable credit (17.5 percent under the proposed system) exclusively whereas purchases use the full
credit (25% under the proposed change, 35% currently).
Smaller Rooftop Commercial (<250 kW) Impacts: $4.7 million GF Savings
The small commercial market is already declining statewide due to the high penetration levels of PV on
utilities’ distribution circuits feeding commercial areas. These areas have been built out for some time and the
majority of new commercial systems are idiosyncratic smaller churches and non-profits, or condominium
associations, all of which have more complex PPA financing structures and approval processes than standard
commercial rooftop PV systems. This market only experiences a modest volume drop of 15 percent due to
the fact that it is falling anyway and is somewhat less price sensitive to changes in the incentive because the
systems are being used to directly offset user load costs at the full utility retail rate. Nonetheless, it is
important it note that power purchase agreement pricing for the smaller non-profit type systems that will
continue to be installed will increase substantially to the power user as a result of the proposed change.
Larger Rooftop/Parking Commercial (>250 kW) Impacts: $4.7 million GF Savings
At this point in the evolution of Hawaii’s solar market larger rooftop systems have primarily been built in
areas where they can be easily interconnected and where clients have straightforward decision-making
procedures, and that portion of the market has been largely saturated. The remaining demand for rooftop
projects in this size range is largely for public sector facilities such as schools, government buildings and the
like, all of which require third-party PPA financing to take advantage of the federal and state tax benefits.
These projects have been slower to develop because they typically involve protracted PPA negotiations and in
many cases have multiple stages of award/audit and due diligence prior to being constructed. The other
remaining area of market demand for larger commercial projects is in covered parking projects, which have
been slower to develop because they are more costly to build and/or are sited at townhouse or condo
associations. In virtually all cases, remaining projects in these size classes are employing some kind of third
party financing (PPA or tax leases), which are very sensitive to changes in pricing and incentive levels.
Volume in the remaining portions of this market segment is projected to fall by 25 percent due to end user
resistance to the higher energy prices which will be required by PPA/lease providers to offset loss of some
incentive, and withdrawal from the market by some financiers due to the increased risk premium associated
with the unanticipated changes in state tax policy. Savings in this group are modest despite the 25 percent
decline in volume because of the relatively small size of this market segment.
Feed-in Tariff Projects under 500 kW (Tier 2 FIT Projects): $15.3 million GF Savings
Feed-in tariff (FIT) projects receive vastly lower benefit from energy revenues than projects that offset the
user’s electrical load because under the FIT contract all power is sold to the utility at a wholesale rate that is
between 35 and 50 percent less than the retail rate. This makes the economics on these projects tighter than
they would be on load offsetting projects and, as a result, they are more sensitive to changes in the incentive
level than load offset projects. Put another way, load offset projects are driven by the owner’s ongoing need
to meet its own electrical demand and concerns about future utility rate growth. No such concern affects FIT
project developers: When the risk-adjusted economics of the project fall below their required market levels of
return on investment, they simply walk away. As a result, this market segment will suffer higher volume
reduction from the proposed change in the incentive, falling by at least 30 percent and perhaps as much as 70
percent. Since these projects use the lower refundable credit exclusively, there is no savings impact from a
shift in the form of the credit accessed by developers. A 30 percent reduction in volume produces a $15.3
million reduction in GF obligations, and this estimate is almost certainly conservative–market volume falloff
could be as high as 70 percent (i.e., $30.6 million savings).
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&
/&&&The change is projected to shift the residential market from a projected 50/50 split between purchases and leases to
60/40 leases, accelerating a trend that began in 2010 toward increasing use of lease financing. &
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Utility Scale PPAs and Tier 3 FIT Projects: $10.9 million GF Savings (or more)
Utility scale projects have all of the same financing characteristics and issues as Tier 2 FIT projects, except
they typically have lower energy sales rates and are more risky and costly to develop because they require
substations, line extensions, and various other interconnection infrastructure improvements that are not
includable in the tax basis of the project and are not required on smaller projects. These projects will have
economics and financiers that are the most sensitive to changes in the rules because they rely heavily on stable
policy environments due to their long development timelines, typically 3 to 5 years in Hawaii. The estimates
$10.9 million in savings is conservative because the estimated 50 percent reduction in in-service dollar volume
may very well shift to zero under the reduced credit amount, in which case savings will be nearly $22 million.
Utility Scale Production Tax Credit (PTC)
In addition, it is important to note that a broad consensus exists for the conversion of utility scale solar and
wind from an investment-based to a production-based tax incentive structure. For relatively high-cost
systems that appear periodically but are not a part of the ‘normal flow of business’ government agencies
typically favor spreading the payment obligation over time. Developers and investors are also comfortable
with production credits because the timing of the incentive payment stream matches up with project debt
service obligations. A production-based credit would take the cost of an existing credit and pay it out over ten
years, rather than one year.
The table below shows that a PTC level can be chosen that keeps the industry viable while reducing the
amount paid out in any year. Additionally, PTC at $0.08 (as proposed in HB2417 CD1) can keep the overall
GF obligation more or less static, even without allowing for any discounting of the payments over time. That
is, the present value of the GF obligation is actually much lower under an $0.08/kWh PTC than it is under
the current system. Overall, the impact if introducing a PTC would be to lower the GF payout in 2014
without reducing the projected level of development (which does occur when the credit is left as an
investment based credit but scaled back).
Incentive Value for 1 MW System under Various Incentive Systems
Year
Current
System
PTC per kWh
$0.06 $0.07 $0.08 $0.09 $0.10
1 $1,225,000 $96,767 $112,895 $129,023 $145,151 $161,279
2 $96,284 $112,331 $128,378 $144,425 $160,473
3 $95,802 $111,769 $127,736 $143,703 $159,670
4 $95,323 $111,210 $127,098 $142,985 $158,872
5 $94,847 $110,654 $126,462 $142,270 $158,078
6 $94,372 $110,101 $125,830 $141,558 $157,287
7 $93,900 $109,551 $125,201 $140,851 $156,501
8 $93,431 $109,003 $124,575 $140,146 $155,718
9 $92,964 $108,458 $123,952 $139,446 $154,940
10 $92,499 $107,915 $123,332 $138,748 $154,165
Total $1,225,000 $946,190 $1,103,888 $1,261,586 $1,419,284 $1,576,983
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Because of the complex nature of financing involving tax credits, the market is very susceptible to extreme
changes based on even short-term threats of changes to incentives. A very good proof of that point exists in
the history of the U.S. wind energy market. The wind industry has relied heavily on Federal production tax
credits (“PTCs”), and since 1999, Congress has allowed those credits to lapse for short periods of time, or in
one case, simply waited until the last minute to extend them. The results were a drastic boom-bust cycle:
On the other extreme, the nation of Brazil has demonstrated how a well-managed incentive program can
generate a large, strong domestic industry that can be competitive without subsidies. Brazil started with a
large subsidy for wind energy, but structured the subsidy, and changes in the subsidy, to attract the strongest
competitors to the marketplace, induce them to make long-term investments, and the weed out the inefficient
players by gradually reducing the subsidies. The result is that Brazil now has one of the most competitive
wind industries in the world: In an open energy auction in mid-2011, unsubsidized wind energy producers
were able to bid power into the Brazilian electrical grid at 6.38/kWh – even more cheaply than natural gas
producers.
The Legislature is already on a path to gradually phase down and possibly phase out the solar tax credit in
Hawai`i. If that process is managed carefully, and adequate precautions are taken to protect via a
‘grandfathering’ mechanism the vested interest of projects which have invested months or even years in
reliance on the current credit structure, then Hawaii can offer the United States a similar leadership example,
and emerge with an industry that will continue to supply both jobs and clean, locally produced energy to
Hawai`i into the indefinite future.
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Appendix – Market Segments and Financing Structures
Market Segments
Residential Market
• Typical size 4-8 kW
• Typical cost $5-6/watt, $20,000 to $50,000
• Development cycle: 4-8 months from decision to completion
• Construction time: 1-2 days
• Estimated 2012 dollar volume: $200 million
• Total jobs supported (direct & indirect, using DBEDT model of 11.1 jobs/$1 million): 2,200
• Total direct jobs: 1,500
• Proportion third-party financed (2012): 40%
• Homeowner motivation: Offset energy load purchased from utility, resulting in direct savings of full
utility retail price for amount of energy offset
Small Commercial Market (<250kW)
• Typical size 100-200kw, rooftop mounted
• Typical cost $4-5/watt, $400,000 to $1 million
• Typical users: Businesses, non-profits, condominium associations, some public sector
• Development cycle: 6-18 months
• Construction time: 1-3 weeks
• Estimated 2012 dollar volume: $65 million
• Total jobs: 715
• Direct jobs: 500
• Proportion third party financed (2012): 30%
• Owner motivation: Load offset
Large Commercial (>250 kW)
• Typical size 400-800kw, rooftop mounted
• Typical cost $3.50-5/watt, $1.5 – 5 million
• Typical users: Primarily public sector, with some larger businesses and occasional non-profits and
condominium associations
• Development cycle: 1-3 years, principally due to long procurement and negotiation cycles
• Construction time: 1-2 months
• Estimated 2012 dollar volume: $25 million
• Total jobs: 275
• Direct jobs: Included in 500 estimate for small commercial
• Proportion third party financed (2012): 90%
• Owner motivation: Load offset
These larger commercial projects are distinguished from the smaller segment primarily due to the length
of development cycle and heavy reliance on third party financing.
Small Feed-in Tariff (Tier 2, >500kW Oahu >250 kW Neighbor Island)
• Typical size 400-500kw, rooftop mounted
• Typical cost $3.50-4.50/watt, $1.5 – 2.5 million
• Energy buyer: Utility, under pre-approved PUC contract and fixed pricing
155. !"#$%&'()'*)+('+&
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• Development cycle: 1-3 years, principally due to long approval and entitlement processes
• Construction time: 1-2 months
• Estimated 2012 dollar volume: $50 million
• Total jobs: 550
• Direct jobs: Included in 500 estimate for Tier 3/utility scale
• Proportion third party financed (2012): 100%
• Owner motivation: Investment return
Large Feed-in Tariff & Utility Scale (to 5 MW)
• Typical size 3-5 MW, ground mounted
• Typical cost $3.00-4.50/watt, $9 – 25 million
• Energy buyer: Utility, under pre-approved PUC contract and fixed pricing
• Development cycle: 3-5 years
• Construction time: 3-6 months
• Estimated 2012 dollar volume: $50 million
• Total jobs: 550
• Direct jobs: Included in 500 estimate for Tier 2 FIT
• Proportion third party financed (2012): 100%
• Owner motivation: Investment return
Financing Mechanisms
Self-Financed
• Site owner/energy user funds construction from savings, capital and/or borrowings
• Motivation is reduction in overall energy costs and stabilization of those costs
• Generally limited to residential and small commercial due to inability of owners to utilize all of
the tax benefits for larger systems
• Price sensitivity is moderate, due to extremely high cost of utility-supplied energy and general
perception that utility rates will continue to rise for the foreseeable future
Third-Party Financed
• Investor purchases and owns system, sells energy or leases system to site owner
• Investor motivation is return on investment from tax benefits and cash flow from energy/lease
payments
• Investor is highly price sensitive to both system cost and tax incentives
• Investors rely heavily on stable financing environment due to time and expense of planning and
implementing financings
156. NEIL ABERCROMBIE
GOVERNOR
BRIAN SCHATZ
LT. GOVERNOR
STATE OF HAWAII
DEPARTMENT OF TAXATION
P.O. BOX 259
HONOLULU, HAWAII 96809
PHONE NO: (808) 587-5334
FAX NO: (808) 587-1584
FREDERICK D. PABLO
DIRECTOR OF TAXATION
RANDOLF L. M. BALDEMOR
DEPUTY DIRECTOR
January 6, 2012
Letter Ruling No. 2012-01
[redacted text]
[redacted text]
RE: RENEWABLE ENERGY TECHNOLOGIES INCOME TAX CREDIT;
ANALYSIS OF A SYSTEM AND PROPERTY SERVED
Dear [redacted text]:
This responds to your letter dated September 13, 2011 (the “Ruling Request”), wherein
[redacted text] (the "Taxpayer") and [redacted text] (the “Parent”) requested confirmation
regarding application of the Renewable Energy Technologies Income Tax Credit (“RETITC”)
under Section 235-12.5, Hawaii Revised Statutes (“HRS”), as further discussed below.
QUESTIONS PRESENTED
There are two questions presented in your Ruling Request, which are as follows:
(1) Whether each assembly of photovoltaic equipment (“PV System”) installed and
placed in service by the Taxpayer constitutes a separate “solar energy system”
within the meaning of HRS § 235-12.5; and
(2) Whether each PV System services commercial property for purposes of the
RETITC.
SHORT ANSWERS
Based on the facts set forth in this letter:
(1) Each PV System qualifies as a “solar energy system” under HRS § 235-12.5, and
therefore Taxpayer may claim a separate RETITC for each PV System installed
and placed in service; and
EXHIBIT 19
