In September, the State of Hawaii Department of Taxation issued a letter ruling (Hawaii Letter Ruling No. 2018-01) that clarified the "placed in service" requirement in the application of the Renewable Energy Technologies Income Tax Credit ("RETITC") in Hawaii. A project was denied RETITC in the year when testing was conducted because the project had not obtained all legal permits and did not satisfy certain legal requirement.
Taxpayer contracted with an installer to build a commercial solar system. The system was turned on for testing in 2017. The testing was successful except that Taxpayer had not installed a fence around outdoor electrical property as required by the building and electrical codes. The inspector refused to sign off and advised Taxpayer to build the fence. The fence was installed in January 2018.
In Hawaii, RETITC is issued to renewable energy systems that are "installed and placed in service" during the taxable year.1 A system must be "ready and available for its specific use" to be considered properly "installed and placed in service."2 Citing the U.S. Tax Court's decision on federal investment tax credits,3 the ruling provides that use of the system during construction generally does not satisfy the placed-in-service requirement. The ruling provides that typically the government's approval to operate a system indicates that the system has been placed in service. When either facts are not clear or the taxpayer does not have all information regarding the permitting process, the Department will analyze five factors: 1) whether the necessary permits and licenses for operation have been obtained; 2) whether critical preoperational testing has been completed; 3) whether the taxpayer has control of the facility; 4) whether the unit has been synchronized with the transmission grid; and 5) whether daily or regular operation has begun. None of the factors is dispositive.
The ruling provides that except for the fourth factor, which does not apply to Taxpayer's system, only the second factor supports a granting of RETITC to Taxpayer's system in 2017. The first factor indicates that the system must be compliant with all applicable laws. As Taxpayer's system did not have a fence as required, this factor was only satisfied in 2018. Taxpayer had physical control of the system after construction was completed in 2017, but the indicia of physical and legal control were enhanced in 2018 with the installation of fencing and the approval of all required permits. Taxpayer could not establish a time when regular operation of the system started. The ruling provides that regular operation could not legally had begun before all necessary permits were obtained. Therefore, the system could not have commenced operation before 2018. The ruling concludes that the second factor was outweighed by the other factors and, therefore, the system was placed in service in 2018.
The "specific use" standard provided in the Hawaii Administrative Rules and the five-factor test provided in the ruling are analogous to the standard and test the U.S. Treasury and the IRS adopted with respect to federal investment tax credits.[iv] In the Department's ruling, obtaining governmental approval and permits on time is critical. Although the testing for the system was conducted in 2017 and the system was transferred to Taxpayer's control in 2017, the Department refused to allow the RETITC with respect to the system until it satisfied the fencing requirement in 2018.
1 Haw. Rev. Stat. § 235-12.5(a).
2 Haw. Admin. Rules § 18-235-12.5-01(a)(3).
3 See Noell v. Comm'r, 66 T.C. 718, 729 (1976).
4 See Treas. Reg. §§ 1.46-3(d)(1)(ii), 1.167(a)-11(e)(1)(i); see Sealy Power, Ltd. v. Comm'r, 46 F.3d 382, 395 (5th Cir. 1995), nonacq. 1996-1 C.B. 6 and A.O.D., 1995-10 (Aug. 7, 1995); Consumers Power v. Comm'r, 89 T.C. 710, 725-26 (1987); Oglethorpe Power Corp. v. Comm'r, 60 T.C.M. 850, 860 (1990).
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