Does Kansas sales tax apply to electricity a homeowner buys from a third-party solar developer under a solar power purchase agreement (PPA)?

Plain-English summary

A solar developer asked how Kansas sales tax would apply to electricity it sells to a Kansas homeowner under a solar power purchase agreement (PPA) — a financing arrangement where the developer installs solar panels on the customer's property at little or no upfront cost and sells the generated electricity to the homeowner at a fixed rate, typically below the local utility's retail rate.

The Department did not answer the tax question. It explained that under the Kansas Retail Electric Suppliers Act (RESA), only the certified public utility for a given territory may furnish retail electric service; a company that is not a public utility cannot lawfully sell retail power to a Kansas resident (K.S.A. 66-1,170 to 66-1,176c; K.S.A. 66-104). Kansas net metering requires the utility or the customer-generator itself to own the generating equipment. Because the developer is not authorized to enter such a PPA, the arrangement "cannot currently arise under current Kansas law," so the taxability question "has no practical significance," and the Department declined to speculate.

The letter contrasts New York, which does allow third-party PPAs and has addressed their sales-tax treatment (New York Technical Memorandum TSB-M-15(5)S). The Department invited the company to resubmit its question if the Kansas legislature later legalizes such agreements.

What this means for you

Solar developers

As of this 2016 letter, you cannot lawfully sell electricity directly to a Kansas homeowner under a third-party PPA unless you are — or become — a certified public utility. Because the arrangement is not legal, the Department will not opine on its sales-tax treatment.

Homeowners considering rooftop solar

In Kansas you generally cannot buy your solar electricity from a third party under a PPA; the certified public utility for your area, or you yourself, must own the system. A solar lease or an outright purchase of a system is a different arrangement — this letter addresses only third-party PPAs.

Tax professionals

This is a "we decline to rule" opinion grounded in the electric-utility regulatory bar, not in the tax statutes. If Kansas law changes to permit third-party PPAs, the sales-tax question is still open. The contrast with New York's TSB-M-15(5)S shows how states that allow PPAs have had to work through the tax consequences.

Common questions

Q: Can I buy my home solar electricity from a third-party developer in Kansas?
A: Not under this 2016 guidance. The Retail Electric Suppliers Act reserves retail electric service to the certified public utility, so a non-utility developer cannot sell you the power.

Q: Did Kansas say solar PPA electricity is taxable or exempt?
A: Neither. The Department declined to answer because the arrangement is not lawful in Kansas, so the question cannot currently arise.

Q: Could this change?
A: Yes. The Department said to resubmit the question if the Kansas legislature acts to authorize third-party PPAs.

Q: Does this opinion bind the Department?
A: An Opinion Letter is general guidance; it does not have the force of law, and another taxpayer with different facts should not assume the same treatment applies.

Citations and references

• K.S.A. 66-1,170 to 66-1,176c — Retail Electric Suppliers Act (RESA)
• K.S.A. 66-104 — definition of a public utility
• New York Technical Memorandum TSB-M-15(5)S — cited as a contrast (New York permits third-party PPAs)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2016-001

Original ruling text

Opinion Letter

Body:

January 25, 2016

XXXX
XXXX
XXXX

RE: Your e-mail received on January 19, 2016

Dear XXXX:

Thank you for your recent e-mail. You ask how Kansas sales tax applies to solar-generated electricity that is sold to a Kansas homeowner under solar power purchase agreement that is entered into by the homeowner and an entity other than the Kansas public utility that is authorized by the Kansas Corporation Commission ("KCC") to provide electric service to that homeowner.

A solar power purchase agreement (PPA) is a financing agreement where a developer contracts for the design, permitting, financing, and installation of a solar energy system on a customer's property at little to no cost. The developer agrees to sell the power generated by the solar installation to the host customer at a fixed rate that is typically lower than the local utility's retail rate. This lower electricity cost serves to offset the customer's purchase of electricity from the utility while the developer receives the income from its charges to the customer for electricity as well as any tax credits and other incentives generated from the system. PPAs typically range from 10 to 25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement. At the end of the contract term, the customer may be allowed to extend the PPA, have the developer remove the system, or choose to buy the system from the developer.

Your company is not authorized to enter into a PPA and provide electric services to Kansas residents. An FAQ published on the Kansas Corporation Commission website instructs:

Can I purchase power from a third party, other than myself or the investor owned electric utilities, for instance, if a third party installed a solar array on my property to sell energy to me?

No. The Retail Electric Suppliers Act (RESA) prohibits the furnishing of retail electric service by any person or company other than the certified public utility for a particular territory. (K.S.A. 66-1,170 to 66-1,176c). K.S.A. 66-104 defines a public utility. A company could venture into the process of being certified as a public utility, but it involves an extensive process. If an entity is not a "public utility" it cannot sell retail power in the state of Kansas, which is what such a transaction would be if the power is sold to a retail customer. Therefore, a certified public utility or the customer-generator itself must have an ownership interest in the generating equipment used for net metering.

http://www.kcc.state.ks.us/energy/net_metering_faq.htm

Because your company cannot lawfully enter into a PPA with a Kansas resident, your question about the taxability of the charges that you will bill to a Kansas customer under a PPA presents a question that cannot currently arise under current Kansas law, and therefore has no practical significance. Accordingly, the department declines to speculate about what the answer might be if the Kansas legislature acts sometime in the future to authorize companies like yours to lawfully enters into a PPA agreement with a Kansas resident.

New York state law allows PPAs to be entered into by New York homeowners and third-party developers like your company. New York Technical Memorandum TSB-M-15(5)S discusses how New York sales tax applies to electricity that is billed to a homeowner under a such PPA agreement. The Memorandum identifies and discusses other the tax issues that can arise from such third-party PPA agreements.

If the Kansas legislature acts to legalize such PPA agreements, please resubmit your question if it has not been directly answered by the new legislation, and the department will attempt to answer it.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 01/27/2016 Date Modified: 01/27/2016

Table 1

| Letter Number: | O-2016-001 |

Table 2

| Tax Type: | Kansas Retailers' Sales Tax |
| Brief Description: | Solar Power Purchase Agreements |
| Keywords: | |
| Effective Date: | 01/25/2016 |