Are the components of a leased residential rooftop solar photovoltaic system exempt from Colorado sales and use tax under the renewable-energy components exemption?
Plain-English summary
A company that leases turnkey rooftop solar (photovoltaic) systems to homeowners asked whether its purchase of the systems, and the customers' lease/purchase of them, are exempt from Colorado sales and use tax. The Department ruled the systems are largely exempt under Colorado's renewable-energy components exemption (§ 39-26-724) — with a single carve-out for the on-site monitoring device, which is taxable.
How the business works: independent contractors buy the components, install the system (modules, mounting racks, inverter, on-site monitor, wiring) on the homeowner's roof under a lump-sum contract, and hold title during installation. The company then leases the installed system to the homeowner for a term over three years; the lease says the system stays personal property (not a fixture) and is removable. At lease-end the customer can buy it at fair market value.
The components are exempt. Section 39-26-724 exempts qualifying renewable-energy components, and crucially it applies to all sales and uses of those components — not just the final consumer's purchase. So the contractor-to-company sale is exempt too. The statute lists qualifying components (solar modules, racks/supporting structures, inverters, wiring and other "balance of system" components, etc.) in § 39-26-724(2)(b)(I) and non-qualifying items (labor, energy storage devices, "remote monitoring" systems, and anything beyond the generator step-up transformer) in (2)(b)(II). The company also gets a backup: even if the system were a real-property fixture, the tax wouldn't apply (sales/use tax reaches only personal property), and if it's personal property the contractor has a sale-for-resale exemption. So the Department didn't need to decide the fixture question.
The on-site monitor is the exception. It's not named in either statutory list. The Department agreed it isn't a "remote monitoring" system (those are the SCADA setups large commercial wind/solar facilities use to control generation from afar), but the lists aren't exclusive, so it still had to classify it. Reading the exemption narrowly (taxpayer bears the burden), the Department found the common thread of qualifying components is that they are directly used to produce electricity — like the "directly used" standard for manufacturing machinery (§ 39-26-709). The on-site monitor doesn't run or control the system; it performs an administrative function (recording energy sold to the utility, telling the homeowner when to use appliances). That's too attenuated from producing electricity, so it's not a qualified component and is taxable.
Even so, the company owes no tax when it acquires the monitor from the contractor (sale-for-resale, since it re-leases it). On the customer side, because the monitor's value is small, the Department let the company either (a) separately state and collect tax on the monitor's lease/purchase price (with a reasonable markup) or (b) simply pay use tax on the monitor's fair market value and pass it through. Leases of personal property over three years are treated as sales (so they'd be taxable but for the exemption); the Department expressly did not decide whether this was a true lease or a finance lease.
Because this is a private letter ruling, it is binding on the Department only for this taxpayer and these facts and cannot be relied on by anyone else.
What this means for you
Solar installers, lessors, and their contractors
Qualifying solar PV components are exempt under § 39-26-724 across the whole supply chain — the contractor's purchase, the lessor's purchase, and the homeowner's lease/purchase — not just the end user. Map each item to the statutory lists. Watch the parts-vs-component trap: buying the parts of a qualifying component (rather than the component itself) doesn't get the exemption, even if the parts are later assembled into a qualifying component.
The monitoring/metering gotcha
Devices that monitor or report rather than generate are vulnerable. An on-site monitor that just records production and informs the homeowner is taxable because it isn't "directly used" to produce electricity. For low-value taxable add-ons like this, paying use tax on fair market value can be simpler than separately stating and collecting on each lease.
Accountants and tax professionals
The doctrinal engine is "directly used in production," borrowed from the manufacturing-machinery line (§ 39-26-709), applied to renewable components — plus narrow construction and the taxpayer's burden (RTD v. Charnes; GM v. Denver). Note the belt-and-suspenders reasoning: exempt as a renewable component or non-taxable as a fixture or sale-for-resale, so the fixture and true-vs-finance-lease questions were left open.
Common questions
Q: Is a residential solar system exempt from Colorado sales tax?
A: The qualifying components (modules, racks, inverter, wiring) are exempt under the renewable-energy components exemption, and the exemption runs through the whole supply chain — contractor, lessor, and homeowner. The on-site monitoring device is the exception and is taxable.
Q: Why is the on-site monitor taxable when the rest of the system isn't?
A: Because qualifying components must be directly used to produce electricity. The monitor only records output and informs the homeowner — an administrative function — so it doesn't qualify, even though it isn't a "remote monitoring" system.
Q: How is the tax on the monitor handled?
A: The lessor can separately state and collect tax on the monitor's lease/purchase price (with a reasonable markup), or, because its value is small, simply pay use tax on its fair market value and pass that cost through to the customer.
Q: Can my solar company rely on this ruling?
A: No. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied on by anyone else.
Citations and references
Statutes, rules, and cases:
- § 39-26-724, C.R.S. (renewable-energy components exemption; (2)(b)(I) qualifying, (2)(b)(II) non-qualifying)
- § 39-26-709, C.R.S. (manufacturing machinery "directly used" standard)
- § 39-26-111, C.R.S. (credit/installment sales; leases)
- Regional Transp. Dist. v. Charnes, 660 P.2d 24 (Colo. App. 1982) (exemptions narrowly construed)
- General Motors v. City & County of Denver, 990 P.2d 59 (Colo. 1999) (taxpayer's burden)
- GIL-08-023; GIL-11-013 (true vs. finance lease)
- 1 CCR 201-1, Reg. 24-35-103.5 (private letter ruling procedure)
Related rulings
- [[gil-12-010-tangible-personal-property-assembled-in-colorado]] — component/ingredient and "directly used" reasoning
- [[gil-13-023-lease-of-medical-equipment]] — leases of TPP over three years treated as sales
- [[plr-11-010-private-letter-ruling]] — narrow construction; directly-used-in-production thread
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-11-009.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
PLR-11-009
December 21, 2011
xxxxxxxxxxxxxxx
Attn:XXXXXXXXXXX
xxxxxxxxxxxxxxx
xxxxxxxxxxxxxxx
Re: Private Letter Ruling
Dear XXXXXXXXXX,
Your firm submitted on behalf of XXXXXXXXXXXXXX ("Company") a request for a
private letter ruling to the Colorado Department of Revenue ("Department") pursuant to
Regulation 24-35-103.5. This letter is the Department's private letter ruling.
Issues
1. Is the Company's purchase of XXXXXXXXXXXXXXX ("System") exempt from state
and state-administered local sales taxes because the System qualifies either for the
Resale exemption (defined below) or for the Renewable exemption (defined
below)?
2. Does the Customer's purchase of the System qualify for the Renewable
exemption?
Conclusion
1. Company's purchase of the System from Contractor is exempt from state and state
administered local taxes.
- Customer's lease and purchase of the System is exempt from state and state
administered sales and use taxes under the Renewable Components exemption,
except the on-site monitoring system which is subject to sales and use taxes.
Background
Company is in the business of leasing turnkey photovoltaic energy systems ("System")
to residential customers ("Customers"). A System consists of photovoltaic modules,
mounting racks, an inverter, an on-site monitoring system, and wiring. Photovoltaic
modules are mounted to a home - typically a roof - with mounting racks and related
hardware. Company's mounting racks are designed to be removable. The modules
convert sunlight into direct current electricity. Because direct current electricity is
unsuitable for most household applications, an inverter converts direct current
electricity to alternating current electricity. An on-site monitoring device monitors the
amount of power produced by the System and the performance of the panels and
inverter. After passing through the inverter and monitoring device, electricity enters the
home and is available for consumption by customer. Unused power is sent to the local
utility's distribution grid and, in some regions, can offset the customer's use of power
from the grid.
Company engages independent contractors ("Contractor'') to market the System to
potential residential customers, and, when they locate willing customers, to procure
and install Systems on customers' homes. Company's contracts require its contractors
purchase components for each System they install and provide all labor, supplies,
tools, insurance, and certifications necessary to install and test the System. During
installation, Contractors retain title to, and possession of, the System. Company pays
Contractor an agreed-upon fixed price for the System in two installments (i.e., a portion
after substantial completion and the remainder after testing). The contracts are lump
sum - neither contract nor invoices separately state charges for materials and
installation.
After purchasing a System, Company leases it to its customer - the residential
homeowner. Its lease agreements provide that a System dose not become a fixture
(i.e., it remains tangible personal property) and that Company may remove it after the
lease terminates. All customer leases have terms that are greater than three years.
After a lease term (including renewals) expires, a customer may purchase the System
for its fair market value or have Company remove it.
Discussion
1. Company's purchase of the System is not subject to sales or use taxes
administered by the Department.
We find that the contract between Contractor and Company is not subject to sales or
use tax. Company's purchase of the System is exempt under the Renewable
Component exemption set forth in §39-26-724, C.R.S.,1 which applies not only to
purchases by the ultimate consumer (Customer) but to "all" sales and uses of
qualifying renewable energy components.
We also note that, if the System is a real property fixture when possession passes to
Customer, then the transaction is not subject to sales and use taxes because these
taxes apply only to the sale and use of personal property. However, we do not
determine here whether the System is a fixture when purchased by Company because
the transaction is exempt regardless of such a determination.
1 Subsection
724 exempts the sale of components used to produce energy from renewable energy
sources, including photovoltaic energy systems.
2
For purposes of completeness, we also note that Contractor is entitled to a sale-for
resale exemption for its purchase and use of component parts used to construct the
System if the System is not a real property fixture, regardless of whether the
components are exempt under the Renewable Component exemption. Conversely,
Contractor is not entitled to the resale exemption if the contract is for the building of a
real property fixture, but Contractor is entitled to the Renewable Component exemption
if Contractor's purchases from suppliers are of qualifying components. For example,
Company represents that Contractor purchases solar modules that meet the statutory
definition of "solar modules." As such, Contractor's purchases of these modules are
exempt because the Renewable Component exemption applies to all purchases, not
just purchases by the ultimate consumer. However, Contractor cannot claim the
Renewable Component exemption if Contractor is purchasing from suppliers only the
parts of qualifying components and not the components themselves. This is true even
if the parts, when assembled, become qualifying components.
We next tum to the issue of whether the various components of the System qualify as
"components" under subsection 724. Company represents that the System is solely
comprised of those items specifically identified in subsection 724, except for an on-site
monitoring system, which we discuss below. Based on this representation, we rule that
Company's purchases of components that are specifically listed in subsection 724 are
exempt.
With respect to the on-site monitoring component, we find that it does not qualify as a
"component." We first consider the statutory terms. Subsection 724(2)(b)(I) identifies
the following components as exempt: wind turbines, rotors and blades, solar modules,
trackers, generating equipment, supporting structures or racks, inverters, towers, and
foundations, balance of system components such as wiring, control systems,
switchgears, and generator step-up transformers, and concentrating solar power
components that include, but are not limited to, mirrors, plumbing, and heat
exchangers. Subsection 724(2)(b)(II) then lists components that are not exempt: any
component beyond the point of a generator step-up transformer located at the
production site,2 labor, energy storage devices, and "remote monitoring" systems. The
term "on-site monitoring system" is not found in either category, but would appear at
first blush to be similar to the remote monitoring system listed in the non-qualifying
equipment list.
Company argues that its on-site monitoring system is not a "remote monitoring" system
as this term is used in subsection 724(b)(II). Company represents that "remote
monitoring" systems are those used by large commercial wind and solar energy
generation facilities to monitor and operate generation equipment from facilities
separate from the generation site. Company represents that most large solar and wind
generation facilities use sophisticated "supervisory control and data acquisition"
(SCADA) systems enabling employees to monitor system performance and to make
2 Company represents that a generator step-up transformer is typically used in commercial settings and
is not used in its System for residential homes. Thus, there is no reference point to determine whether
the on-site monitoring component is located beyond such a generator.
3
necessary adjustments, all from remote locations. In distinction to remote monitoring
systems, the on-site monitoring system at issue here is part of the on-site meter and
provides lessees with information regarding the amount of electricity that their system
generates. In some cases, these on-site monitors can also send this information to
Company through lessee's Internet connection, but the Company cannot control the
System.
We agree that the "remote" monitoring component listed in subsection 724(b)(II)
suggests a component that is not located on the System's premises. In this case,
Customer is the principal user of the on-site monitoring component. This monitoring
system allows the Customer to determine the amount of electrical energy being used
by the System and make decisions related to when and what household appliance
should be used. Customers also use this component to track sales of electrical energy
to electricity utilities. Although Company may make use of the data, it is not the
component's predominant function. Thus, we find that this on-site monitoring system
is not a remote monitoring system as used in subsection 724(2)(b)(II).
However, the lists of qualifying and non-qualifying equipment are not exclusive.3 We
must still determine if the on-site monitoring component more accurately falls within the
qualified components category or within the non-qualifying components category. And
in this inquiry, we are guided by at least two well-established rules for interpreting
statutes. First, exemptions are narrowly interpreted. Regional Transp. Dist. v.
Chames, 660 P.2d 24, 25 (Colo. App. 1982). Second, taxpayer has the burden of
establishing that the transaction clearly falls within an exemption. General Motors v.
City and County of Denver, 990 P.2d 59 (Colo. 1999).
The common thread between these lists is that qualifying components are those that
are directly used for the production of electricity. This is a common criterion used to
evaluate whether the sale or use of tangible property is exempt in a host of other
settings. For example, machines and machine tools used in manufacturing are
exempt; however, manufacturing involves a variety of machines and equipment and
not all are exempt. Equipment that is not directly used in the manufacturing process
(e.g., computers used by administrative staff of a manufacturing company) is not
exempt even though the equipment may have some connection to the manufacturing
process.4
We are impressed by the fact that the System is largely, if not completely, automated
and does not require a monitoring device in order to operate. Indeed, the monitoring
component does not control or operate the System. Rather, the monitor performs an
administrative function of recording energy sales to the utility and providing information
"'Components used in the production of alternating current electricity from renewable energy source'
shall include, but are not limited to, ..."
4 §39-26-709, C.R.S. See, also, §39-26-719(1)(d), 2(c) and 3(c) (items directly used in farm operations);
Special Regulation 2, Agricultural Producers (land directly used in agricultural operation); §39-26-401(4)
(equipment directly used in biotechnology research); §39-26-601(1) (property directly used in research
and development) (repealed); §39-26-713(2)(e)(l)(B) (property directly used in processing of food).
3
4
to the Customer regarding when best to use household appliances. This administrative
function is too attenuated from the operational needs of the System to qualify as an
exempt Renewable Component. Therefore, we conclude that the on-site monitoring
system is not a qualified component.
Although the on-site monitoring system is not exempt under the Renewable Energy
exemption, Company is not liable for sales or use tax when it acquires this on-site
monitoring component from Contractor, again for two alternative reasons. If the
contract between Contractor and Company is a sale of tangible personal property, then
Company and Contractor are entitled to a sale for resale exemption because Company
resells the component when it leases it to the Customer. On the other hand, if the
contract between the Contractor and Company is for the installation of a real property
fixture, then the Company has not purchased tangible personal property from the
Contractor. In this latter case, however, the Contractor is liable for use tax when it
acquires and installs the on-site monitoring system on Customer's home.
2. Company's lease of the System to Customers is exempt from sales and use taxes
under the Renewable exemption, except for the lease of the on-site monitoring
component.
Leases5 of tangible personal property for more than three years are treated as sales
and are subject to sales and use taxes, unless the lease is otherwise exempt. If the
System remains tangible personal property after it is installed on the Customer's
premise, then the lease of the System is exempt, except with respect to the on-site
monitoring component, because the System qualifies under the Renewable Energy
exemption. Similarly, Company's sale to, and Customer's use of, the System at the
end of the lease is also exempt under the Renewable Component exemption, except
for the on-site monitoring component.
Customer must pay, and the Company must collect, sales tax on the lease price of the
on-site monitoring system and purchase price of the on-site monitoring system if lessee
exercises its option to purchase the component at the expiration of the lease.
Company must calculate this price, which must include a reasonable markup from the
cost of this component, and separately state the price for this item on the Customer's
invoice or contract. Alternatively, Company can pay use tax on the fair market value of
the on-site monitoring component. The on-site monitoring component is
inconsequential in value in relation to the overall price of the System. For this reason,
the Department will allow the seller to pay use tax on this taxable item. Under this
alternative approach, the Department does not have an objection if this use tax is
passed on to Customer as a matter of contract.
5 We do not determine whether the lease at issue is a true lease or a finance lease (i.e., credit sale) in
which the lease and retention of title are merely security interests held by Company. The distinction is
largely irrelevant except when the seller factors the finance lease. See, generally, §39-26-111, C.R.S.;
GIL-08-023 and GIL-11-013.
5
If the System is a real property fixture, including the on-site monitoring system, then the
lease is not subject to sales or use taxes because these taxes apply only to personal
property. However, and as discussed above, Contractor's purchase of the on-site
monitoring system is subject to sales or use tax if the System is a real property fixture.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. You
may wish to consult with local governments which administer their own sales or use
taxes about the applicability of those taxes.
This ruling is premised on the assumption that the Church has completely and
accurately disclosed all material facts. The department reserves the right, among
others, to independently evaluate Church's representations. This ruling is null and void
if any such representation is incorrect and has a material bearing on the conclusions
reached in this ruling. This ruling is subject to modification or revocation in accordance
to Department Regulation 24-35-103.5.
Enclosed is a redacted version of this ruling. You have previously reviewed and stated
you have no comment or objection to the redaction.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue
6