Is Tennessee's law capping green-energy facility property at 0.5% of cost for tax purposes constitutional?

Subject

Opinion No. 12-102, Valuation of Certified Green Energy Production Facility Machinery and Equipment, November 1, 2012

Plain-English summary

The Executive Secretary of the State Board of Equalization asked whether Tenn. Code Ann. § 67-5-604(d) is constitutional. That subsection (added in 2010 by Public Chapter 1134, § 41) extended the pollution-control-facility valuation rule of § 67-5-604(b)(1) to "machinery and equipment used to produce electricity in a certified green energy production facility." Under § 67-5-604(b)(1), the value of such property is "deemed to be its salvage value," which shall "never exceed one-half percent (0.5%) of the [property's] acquisition value."

The AG re-upped a 1986 opinion (Tenn. Att'y Gen. Op. 86-142) that had concluded the pollution-control version of the same rule was constitutionally suspect. With no intervening legal developments to change that analysis, extending the rule to green energy facilities raises the same problem.

The constitutional problem traces to Tenn. Const. art. II, § 28, which requires that "[a]ll property, real, personal or mixed" be taxed, with "equal and uniform" assessment-to-value ratios within each class. The legislature may direct how value is "ascertained," but apart from the specific exemptions enumerated in the constitution, it cannot "carve out exemptions by legislative enactment" (University of the South v. Franklin County).

The AG explained why the 0.5%-cap approach is the practical equivalent of an exemption. The salvage-value-only standard creates an irrebuttable presumption that the property is worth no more than its salvage value. While worn-out equipment might be worth only salvage, there is no basis to presume all such equipment has no greater value (the AG's 1986 opinion cited Peay v. Nolan: "a court is not required to assume the existence of any fact that cannot be reasonably conceived"). Capping the value at 0.5% regardless of actual worth, current use, or depreciation level is effectively a tax exemption. And exemptions outside those listed in the constitution are not allowed.

The AG contrasted this with Tenn. Code Ann. § 67-5-601(e), which addresses property generating electricity from wind: that statute caps value at "one-third of its total installed costs" but offers a credible rationale (the restricted use of wind-generation property reduces its market value) and instructs local assessors to consider that rationale in their appraisal. § 67-5-601(e) doesn't impose an absolute cap so low that it effectively eliminates the tax. So the AG had previously concluded (Op. 03-068) that § 67-5-601(e) was constitutionally defensible.

The takeaway: the legislature has wide latitude to choose valuation methods for ad valorem tax, but the method's goal must be ascertaining the property's actual value (potentially adjusted for restricted use, as in Marion County v. State Board of Equalization, which upheld the Greenbelt valuation methodology). A method that caps value at a level so low it becomes a back-door exemption fails the constitutional test.

Currency note

This opinion was issued in 2012. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The 1985 pollution-control rule

The General Assembly enacted Tenn. Code Ann. § 67-5-604 in 1985 to give pollution-control facilities a favorable property tax treatment: their value is "deemed to be its salvage value," capped at 0.5% of acquisition cost.

The 2010 green energy extension

2010 Tenn. Pub. Acts ch. 1134, § 41 added § 67-5-604(d), extending the same treatment to "machinery and equipment used to produce electricity in a certified green energy production facility." A "certified green energy production facility" is defined in § 67-4-2004(9) as one certified by the Department of Environment and Conservation as producing electricity for use and consumption off the premises using clean energy technology, which the statute defines to include geothermal, hydrogen, solar, and wind sources.

The 1986 AG opinion still stands

Tenn. Att'y Gen. Op. 86-142 had analyzed the pollution-control version of the cap and concluded:

[T]his "salvage value" standard, in itself, creates an irrebuttable presumption that pollution equipment is worth only its salvage value. While wornout pollution control equipment might be worth a mere salvage value, there is no basis in fact to presume that all such equipment has no greater value in actuality. . . . The end result of such an attempt to limit the value of pollution control equipment to its "salvage value" is the "practical equivalent of an exemption from property taxation," which cannot be justified under Article II, section 28 of the Tennessee Constitution.

This 2012 opinion treats the 1986 reasoning as still good law, with no court decision or other AG opinion having undermined it. So extending the suspect rule to a new class of property (green energy production) inherits the constitutional doubt.

The constitutional baseline

Tenn. Const. art. II, § 28 subjects all property to taxation with equal-and-uniform assessment-to-value ratios within each class or subclass. The constitution itself lists certain exempt uses; the legislature can't add new exemptions by statute. University of the South v. Franklin County (Tenn. Ct. App. 1974) is the AG's authority for that rule.

Why the wind-energy statute is different

Tenn. Code Ann. § 67-5-601(e) caps wind-generation property value at "one-third of its total installed costs." The AG had analyzed this in Op. 03-068 and concluded it was defensible because:

• It offers a rational basis for the cap (restricted use of wind-generation property)
• It instructs local assessors to take the restricted-use rationale into account in their actual appraisal
• It doesn't set the cap so low that it functions as an exemption

The contrast: § 67-5-604 sets the cap at 0.5%, an absolute floor that has no relation to the property's actual market value regardless of how the facility is used. That's an exemption in everything but name.

What latitude the legislature actually has

Tax assessors can adjust for restricted use. Marion County v. State Board of Equalization upheld the Greenbelt agricultural valuation, which discounts value based on the property's restricted agricultural use rather than its highest and best use. The constitutional line: methodology may reflect actual restrictions on value, but cannot eliminate the tax by fiat.

Common questions

Has any court actually struck down § 67-5-604?
The opinion does not report a court decision invalidating the statute. The AG's view is that it is constitutionally suspect, which is a prediction about how a court would likely rule.

Are wind farm operators safe under § 67-5-601(e)?
The AG's 2003 opinion (Op. 03-068) concluded § 67-5-601(e) is constitutionally defensible. But § 67-5-601(e) applies specifically to wind-generation property. Solar, geothermal, and hydrogen facilities relied on the now-suspect § 67-5-604(d) for the 0.5% cap. Their tax position is less secure under the AG's analysis.

What should an assessor do with a certified green energy facility's machinery?
The AG opinion casts doubt on the statutory cap, but the statute remains in effect until a court invalidates it. Assessors generally apply the statute as written. Given the AG's view that the cap is constitutionally suspect, affected operators and assessors may want legal advice about their specific situation.

Can the legislature fix this?
A legislative fix would have to keep the valuation method tied to actual value. Either lift the cap, or replace it with a restricted-use methodology that takes assessor judgment into account (like § 67-5-601(e)).

Citations

Statutes and constitutional provisions:

• Tenn. Code Ann. § 67-4-2004(9) (definition of certified green energy production facility)
• Tenn. Code Ann. § 67-5-601(e) (wind-generation property valuation)
• Tenn. Code Ann. § 67-5-604 (pollution control facility valuation)
• Tenn. Code Ann. § 67-5-604(b)(1) (salvage value/0.5% cap)
• Tenn. Code Ann. § 67-5-604(d) (extension to green energy production)
• 2010 Tenn. Pub. Acts ch. 1134, § 41 (enacting subsection (d))
• Tenn. Const. art. II, § 28 (property taxation uniformity)

Cases and prior opinions:

• University of the South v. Franklin County, 506 S.W.2d 779 (Tenn. Ct. App. 1974)
• Peay v. Nolan, 157 Tenn. 222 (1928)
• Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. 1986)
• Tenn. Att'y Gen. Op. 86-142 (Aug. 12, 1986)
• Tenn. Att'y Gen. Op. 03-068 (May 27, 2003)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2012/op12-102.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

November 1, 2012

Opinion No. 12-102

Valuation of Certified Green Energy Production Facility Machinery and Equipment

QUESTION

Is Tenn. Code Ann. § 67-5-604(d) constitutional in setting the value of machinery and equipment used to produce electricity in a certified green energy production facility at no more than one-half percent (0.5%) of the acquisition value of such machinery and equipment for purposes of ad valorem taxation?

OPINION

In 1986, this Office issued an opinion concluding that Tenn. Code Ann. § 67-5-604, which limits the value of pollution control facilities for property tax purposes to no more than one-half percent (0.5%) of the facilities' acquisition value, was of doubtful constitutionality. See Tenn. Att'y Gen. Op. No. 86-142 (Aug. 12, 1986). In 2010, the valuation applied to pollution control facilities was extended to include machinery and equipment used to produce electricity in certified green energy production facilities. See Tenn. Code Ann. § 67-5-604(d). As there have been no legal developments since 1986 to change this Office's analysis, the extension of Tenn. Code Ann. § 67-5-604 to limit valuation of certified green energy production facilities in the same manner as valuation of pollution control facilities would be subject to the same concern.

ANALYSIS

Your request concerns the valuation of machinery and equipment used to produce electricity in a certified green energy production facility. A certified green energy production facility is a facility certified by the Department of Environment and Conservation as "producing electricity for use and consumption off the premises using clean energy technology." Tenn. Code Ann. § 67-4-2004(9). Clean energy technology includes "technology used to generate energy from geothermal, hydrogen, solar, and wind sources." Id.

In 1985, the General Assembly enacted Tenn. Code Ann. § 67-5-604, which limited the value of pollution control facilities for property tax purposes. The statute provides that the value of pollution control facilities is "deemed to be its salvage value," and this salvage value "shall never exceed one-half percent (0.5%) of the [property's] acquisition value." Tenn. Code Ann. § 67-5-604(b)(1). In 2010, Tenn. Code Ann. § 67-5-604 was amended to provide that "[t]he valuation applied to pollution control facilities under this section shall also apply to machinery and equipment used to produce electricity in a certified green energy production facility." Tenn. Code Ann. § 67-5-604(d); see 2010 Tenn. Pub. Acts ch. 1134, § 41.

This Office has previously opined that the valuation method contained in Tenn. Code Ann. § 67-5-604 as it pertains to pollution control facilities, whereby the value of certain property is "deemed" to be its "salvage value" and capped at 0.5% of its acquisition value, is of doubtful constitutionality. See Tenn. Att'y Gen. Op. 86-142 (Aug. 12, 1986). The extension of this valuation method to machinery and equipment used to produce electricity in certified green energy production facilities would be subject to the same concerns.

The Tennessee Constitution subjects "[a]ll property, real, personal or mixed" to taxation and provides that "[t]he ratio of assessment to value of property in each class or subclass shall be equal and uniform throughout the State, the value and definition of property in each class or subclass to be ascertained in such manner as the Legislature shall direct." Tenn. Const. art. II, § 28. Apart from the specific exempt uses described in the Constitution, the Legislature is not authorized to "carve out exemptions by legislative enactment." Tenn. Att'y Gen. Op. No. 86-142 (citing University of the South v. Franklin County, 506 S.W.2d 779 (Tenn. Ct. App. 1974)).

In opining that the valuation method applicable to pollution control facilities was of doubtful constitutional validity, this Office explained that

this "salvage value" standard, in itself, creates an irrebuttable presumption that pollution equipment is worth only its salvage value. While wornout pollution control equipment might be worth a mere salvage value, there is no basis in fact to presume that all such equipment has no greater value in actuality. While legislative determinations as to certain facts may be conclusive in some circumstances, "[a] court is not required to assume the existence of any fact that cannot be reasonably conceived." Peay v. Nolan, 157 Tenn. 222, 235 (1928). The end result of such an attempt to limit the value of pollution control equipment to its "salvage value" is the "practical equivalent of an exemption from property taxation," which cannot be justified under Article II, section 28 of the Tennessee Constitution.

Tenn. Att'y Gen. Op. No. 86-142.

As there have been no legal developments to the contrary in the intervening time, this Office continues to adhere to this opinion. As with pollution control equipment, there is no basis to presume that all machinery and equipment used to produce electricity in a certified green energy production facility is of negligible value. Under Tenn. Code Ann. § 67-5-604, as written, certified green energy production facility property, like pollution control facility property, is "deemed" to be worth no more than 0.5% of its acquisition value, regardless of the property's actual worth, current use, or level of depreciation. The statute contains no findings that would support this valuation method, and it requires property assessors to cap the property's value at 0.5% regardless of whether this amount has any relation to the property's true value. Under these circumstances, the valuation method set forth in Tenn. Code Ann. § 67-5-604 effectively gives certain business owners a property tax exemption that is not authorized by the Constitution.

While the General Assembly has broad power to establish methods to ascertain the value of property for ad valorem tax purposes, those methods must have as their goal the determination of actual value of the property. That value will, of course, be affected if the property has a restricted use. See Marion County v. State Board of Equalization, 710 S.W.2d 521, 523 (1986) (upholding Greenbelt valuation methodology). This Office has indicated that Tenn. Code Ann. § 67-5-601(e), pertaining to the valuation of property that generates electricity using wind as its energy source, is constitutionally defensible. See Tenn. Att'y Gen. Op. 03-068 (May 27, 2003). In contrast to Tenn. Code Ann. § 67-5-604, that statute provides a credible rationale for setting the value of such property at "one-third of its total installed costs" because of its restricted use. Tenn. Code Ann. § 67-5-601(e). Moreover, the statute instructs local assessors to take this rationale into account in appraising the property, but it does not impose an absolute cap on the appraisals, nor does it establish an amount so low that it effectively creates an exemption.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Kelsie Jones
Executive Secretary
State Board of Equalization
1700 James K. Polk Building
505 Deaderick Street
Nashville, Tennessee 37243-1402