On Oct. 18, the Oklahoma Supreme Court unanimously held in Kingfisher Wind LLC v. Wehmuller that federal production tax credits are intangible personal property and thus are not subject to property tax. In this case, Kingfisher developed and built two wind farms in Oklahoma that included over 100 wind turbine generators, electrical equipment, a maintenance facility, substation, and transmission lines. The county assessor valued the wind farms at $458 million, while Kingfisher argued that they were worth only $169 million. The sole discrepancy in valuations resulted from the county assessor including—and Kingfisher excluding—the PTCs’ value.
The county assessors contended that the PTCs were tangible personal property subject to taxation because they “are of such an economic benefit to owning, operating, and determining the full fair cash value of the wind farm and its real property, they must be included to determine a fair and accurate taxable ad valorem valuation of the wind farm.” Kingfisher argued that PTCs are intangible personal property and expressly precluded from taxation by statute.
The Oklahoma Supreme Court observed that the state taxes all real and personal property not expressly excluded, and that Southwestern Bell Telephone Co. v. Okla. State. Bd. of Equalization held that intangible property was to be classified as personal property. Therefore, the question was whether intangible property was expressly excluded. Several years after Southwestern Bell, Oklahoma voters passed a referendum modifying the state’s constitution to expressly provide that as of Jan. 1, 2013, “intangible personal property shall not be subject to ad valorem tax or to any other tax in lieu of ad valorem tax within this State.”
The next question was whether PTCs are intangible property of the sort that the Oklahoma constitution prohibits from being taxed beginning Jan. 1, 2013. To answer this question, the court referred to its own precedent and rules of statutory construction.
In Globe Life and Accident Ins. Co., v. Okla. Tax Com’n, the Oklahoma Supreme Court held, “‘Intangible personal property’ encompasses property rights which—though represented by tangible objects (e.g., stock certificates, bonds and notes)—are essentially incorporeal in that they have limited intrinsic value and ultimately can only be claimed or enforced by a legal action.” Oklahoma rules of statutory construction dictate that “all [statutory] ambiguity must be resolved in favor of the taxpayer.”
The PTCs, like the property at issue in Globe Life (customer lists on magnetic tapes), contained “aspects of both tangible and intangible property.” When considered in light of the aforementioned rule of statutory construction, however, the Oklahoma Supreme Court was compelled to hold that the “PTCs are intangible personal property exempt from ad valorem taxation—even if they have both tangible and intangible aspects.”
The court also observed that while this was a case of first impression in Oklahoma, other state courts have decided whether the value of PTCs was subject to property tax. The differing constitutional and statutory provisions in those other states necessarily caused those state courts to reach different conclusions.
For instance, differing constitutional and statutory provisions have caused courts in Illinois, Michigan, Pennsylvania South Dakota, and Tennessee to hold that the value of tax credits is properly subject to property tax. On the other hand, courts in Arizona, Georgia, Missouri, Ohio, Oregon, and Washington have held that the value of tax credits may not be subject to property tax. This variety of results creates the potential for ambiguity and opportunity.
Since 1992, the Internal Revenue Code has provided for PTCs, which are a federal tax credit that is generated based on the kilowatt hours of electricity produced by certain types of renewable or zero-emission projects such as wind farms. A wind farm developer may not, however, have sufficient federal tax liability to use the PTCs generated by a wind farm project. Many wind project developers (such as Kingfisher) use PTCs to finance the building and development of projects. In such cases, a developer structures the project so that a partner—commonly referred to as a tax equity investor—in the project will contribute capital (cash) in exchange for receiving the PTCs.
PTCs are a material economic component of a wind farm project, so including or excluding the value of PTCs materially impacts the amount of property tax a wind farm pays. Consequently, including or excluding the value of PTCs in the property tax base can have a significant impact of the return on investment of a wind farm project.
The Kingfisher case’s significance lies in, most narrowly, its holding that PTCs are not subject to Oklahoma property tax. Further, the court properly observed that the variety of constitutional and statutory frameworks states have adopted may prohibit the taxation of PTCs in some states while permitting taxation in others.
Finally, Kingfisher underscores the best practice of reviewing applicable laws and assessments to determine whether PTCs—as well as other intangibles, such as goodwill, contracts and intellectual property—may be being improperly included in a property tax base.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Mike Semes is of counsel at BakerHostetler and is a professor of practice at Villanova University Charles Widger School of Law in the graduate tax program.
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