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Solarcity Corporation v. Arizona Department of Revenue

Court of Appeals of Arizona, First Division

May 18, 2017

SOLARCITY CORPORATION, et al., Plaintiffs/Appellants,
ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee. SOLARCITY CORPORATION, et al., Plaintiffs/Appellees,

          Appeal from the Superior Court in Maricopa County No. TX2014-000129 The Honorable Christopher T. Whitten, Judge



          Mooney, Wright & Moore, PLLC, Mesa By Paul J. Mooney, Bart S. Wilhoit Rose Law Group, PC, Scottsdale By Court S. Rich, Logan V. Elia Counsel for Plaintiffs/Appellants/Appellees

          Arizona Attorney General's Office, Phoenix By Kenneth J. Love, Jerry A. Fries, Macaen F. Mahoney Counsel for Defendant/Appellee/Appellant

          Judge Randall M. Howe delivered the opinion of the Court, in which Presiding Judge Kenton D. Jones and Judge Donn Kessler joined.


          HOWE, Judge:

         ¶1In 2013, the Arizona Department of Revenue ("Department") decided that it could value for taxation purposes solar energy panels owned by companies that lease and install the panels on their customers' property for the generation of electricity. The Department determined that the panels could be valued because under the relevant Arizona statutes, the panels were renewable energy equipment that solar power companies used in the operation of an electric generation facility.

         ¶2Two solar power companies, SolarCity Corporation and SunRun, Inc. (collectively, "Taxpayers") sought a declaratory judgment in the tax court that the solar panels were not taxable. They argued that the panels were not renewable energy equipment used in the operation of an electric generation facility, but were used for the customers' production of electricity for their own consumption. They also argued that because the panels were solar energy systems designed to produce electricity primarily for on-site consumption, the panels had no value for taxation purposes.

         ¶3After considering cross-motions for summary judgment, the tax court issued a declaratory judgment agreeing with Taxpayers that the solar panels were not renewable energy equipment used in the operation of an electric generation facility and could not be so valued under the taxation statutes. The tax court further declared, however, that considering solar panels designed primarily for on-site consumption to have no value or to add no value to property for taxation purposes violated the Exemptions and Uniformity Clauses of the Arizona Constitution. The court ruled that valuing the solar panels at zero effectively exempted them from taxation. The court also ruled that distinguishing between solar panels that are used "primarily" for on-site consumption and those that are not did not treat similarly-situated property uniformly. The Department and Taxpayers both appeal that judgment.

          ¶4Upon review, we affirm the judgment in part and reverse in part. The tax court correctly ruled that the Department had no statutory basis to value the solar panels leased to Taxpayers' customers because the panels do not constitute renewable energy equipment used in an electric generation facility. We reverse the tax court's declaration of unconstitutionality, however. Legislatively mandating that Taxpayers' solar panels have or add no value for tax purposes does not exempt them from taxation, and treating solar energy systems designed primarily for on-site consumption differently from those that are not does not violate the principle of uniformity because the two types of systems are not similarly-situated property.


         ¶5Taxpayers sell and lease rooftop solar panel systems to owners of residential and commercial buildings and also install, maintain, and operate the panels. The solar panels take solar energy, convert it to electricity in an inverter, and use the converted energy to meet the building's current electricity demands. Because this process generates electricity for the residence or commercial property without drawing electricity from a utility company, it is referred to as being "behind the meter." The energy that the solar panels produce cannot be stored, however, and must be used as it is generated. Accordingly, whatever generated electricity is not used to meet the building's current electricity demands travels from behind the meter to power grids owned and maintained by traditional utility companies. Taxpayers' solar panels are thus "grid-tied, " or linked to the traditional utility power grids.

         ¶6Most homeowners with Taxpayers' solar panels have a "net-metering" agreement with the traditional utility companies. Net-metering is a process through which the utility companies track the amount of electricity that flows from behind the meter onto the grid from the building's solar panel, and credit the homeowner for the retail value of that amount.[1] The utility companies then apply this credit to offset the cost of electricity that the home or building owner must purchase from the utility company during times when the solar panels cannot produce power.

         ¶7Because the solar panels are intended to generate and provide electricity to meet a building's needs, Taxpayers design each individual system separately. In doing so, they rely on the customer's consumption data to ascertain how much energy the building typically uses, as well as data relating to the physical characteristics of the installation location. After obtaining this data, Taxpayers typically create a solar panel system that produces less than 100% of the annual consumption. This standard ensures compliance with Arizona Corporation Commission regulations that prohibit rooftop solar panel systems from producing more than 125% of the location's annual consumption. How much electricity is actually consumed once a solar panel system is installed, however, depends on the habits of the building owners and several other variables, including weather and the number of occupants during a given period.

         ¶8In 2013, the Department issued a memorandum analyzing two statutes to determine whether solar panels "owned by a solar power company and installed at a customer's site to sell or provide power to the customer" are taxable and subject to valuation by the Department or local valuation by the counties. The first statute, A.R.S. § 42-11054(C)(2), (the "solar energy systems statute") requires the Department to prescribe guidelines for applying standard appraisal methods and techniques to be used by the county assessors in determining a property's value. The statute specifies, however, that in applying any prescribed standard appraisal methods and techniques, "solar energy devices, . . . grid-tied photovoltaic systems and any other device or system designed for the production of solar energy primarily for on-site consumption are considered to have no value and to add no value to the property on which such device or system is installed." A.R.S. § 42-11054(C)(2). The second statute, A.R.S. § 42-14155 (the "renewable energy equipment valuation statute"), requires the Department to value "renewable energy equipment" for taxation purposes at 20% of the equipment's depreciated cost. For purposes of this renewable energy equipment valuation statute, "renewable energy equipment" means "electric generation facilities . . . located in this state, that [are] used or useful for the generation . . . of electric power . . . derived from solar . . . not intended for self-consumption." A.R.S. § 42-14155(C)(3).

         ¶9Reading these statutes together, the Department concluded that leased solar panels should be assessed by the Department under the renewable energy equipment valuation statute as renewable energy equipment. The Department reasoned that because solar panel companies-which own the panels-do not consume the electricity the leased panels produce, the panels are not intended for self-consumption and therefore must be renewable energy equipment. The Department stated that this specific statute applies only when the solar panels are leased by solar panel companies, but not when the homeowners themselves own the panels. In the latter situation, because the solar panel owners would be the ones using the produced energy, the solar energy systems statute would apply and the panels would be considered to have no value and add no value to the property.

         ¶10 In May 2014, Taxpayers asked the Department to reconsider its position because it had incorrectly interpreted the solar energy systems statute. When the Department notified Taxpayers that it stood by its position, Taxpayers sought a declaration in the tax court that the Department lacked authority to assess Taxpayers' leased solar panels under the renewable energy equipment valuation statute because the panels were systems designed for primarily on-site consumption, which meant that under the solar energy systems statute, the panels had no value or added no value to any property on which the panels were installed.

         ¶11 Soon after, Taxpayers moved for summary judgment on the interpretations of the solar energy systems statute and the renewable energy equipment valuation statute. Taxpayers argued that the tax court could enter summary judgment without a need for discovery because the issues presented in the complaint were purely legal and no genuine issues of material fact existed. The Department disagreed, however, and moved for additional time to conduct discovery before responding to Taxpayers' motion. The Department argued that it needed to obtain discovery about how the solar panels deliver electricity, who Taxpayers' customers are, and generally what Taxpayers' business models are. The tax court granted the Department's request.

         ¶12 Disputes continued over the following months about the necessity and sufficiency of discovery requests. Counsel met to confer about the disputes and ultimately resolved many by stipulation. But they were unable to resolve disputes about the disclosure of Taxpayers' strategic plans and the names of representatives that might have other sought-after information, so the Department moved to compel their production. The parties then agreed to stay the motion to allow time to depose Taxpayers' representatives. The Department nevertheless continued to request additional time for discovery and additional information, and ultimately asked the tax court to lift the stay on the motion to compel. The tax court denied the motion. The Department later moved to compel again, but the tax court denied the motion, finding ...

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