In Sun Streams 2, LLC v. Arizona Department of Revenue (PDF) (No. TX2023-000002), the Arizona Tax Court (Court) ruled that the purchase price paid for membership interest in the project owner could not be used as the 'original cost' of renewable energy equipment.

Sun Streams 2 LLC was the owner of a Maricopa County solar energy generation facility (Facility) that paid $245 million for the construction of the equipment installed at the Facility. A purchaser had paid a $340 million purchase price for the acquisition of a 100% membership interest of the entire Facility which included non-taxable components such as land, contractual rights, and tax benefits, along with the solar equipment itself.

In its personal property tax valuation of the Facility, the Arizona Department of Revenue (Department) asserted that the full cash valuation of the equipment was the $340 million purchase price paid for the 100% membership interest in the LLC; the owner argued that the proper valuation of the equipment was the lower $245 million paid for the purchase and installation of the Facility’s equipment.

The Court concluded that the Department’s valuation overstated the taxable equipment cost basis subject to tax under applicable state statute because it included intangible membership interest. Arizona Revised Statutes Section § 42-14155 (D)(4) provides that the Department shall determine the full cash value of taxable renewable energy and storage equipment on the basis of the “original cost” of such equipment meaning the actual cost of such equipment, without trending, of acquiring or construction property, including additions, retirements, adjustments, and transfers. The ruling reinforces the distinction between taxable tangible property costs and broader project-level enterprise value.

What does CohnReznick think?

The decision creates an opportunity to lower Arizona property tax liabilities by excluding intangible costs from reported cost on the annual Property Tax Form 82054(REE).

Renewable energy facility owner/operators should review whether reported costs on their solar energy generation and battery storage assets include items that do not represent the actual cost of acquiring or constructing taxable equipment, including land value, power purchase agreements, interconnection rights, development-stage intangible assets, federal tax credit value, project-level financing premiums, and other transaction or enterprise-value components embedded in acquisition prices.

While direct construction costs such as modules, inverters, racking, substations, and installation-related expenditures generally remain reportable, the ruling strengthens the argument that acquisition-related intangible value and similar non-taxable costs should be removed from the personal property tax basis to the extent they are separately identifiable and not part of the tangible renewable energy equipment cost.

Although the Sun Streams 2, LLC decision applies to Arizona personal property tax valuations of equipment, the concepts applied by the Court should be explored in comparison to state and local personal property tax valuation provisions to assess the taxing jurisdiction’s legal ability to include intangibles and other non-equipment facility enterprise value components in the valuation of the renewable energy facility’s equipment.