While approximately 100 environmental rules and policies were
rolled back or altered during the economy-focused Trump
Administration, President Biden has made clear his intent to
reinstate many of the Obama-era environmental protections that were
weakened or eliminated over the last four years. In his first hours
in office, President Biden, via Executive Order, ordered the
Environmental Protection Agency (EPA) to review several of its
rules and regulations. This is in addition to other environmental
efforts, such as recommitting the United States to the Paris
Climate Agreement. With a primary focus of reducing greenhouse gas
emissions and other various air, water, and ground pollutants, many
industries should expect heightened requirements and environmental
compliance scrutiny over the course of the Biden
Administration.
As some businesses may be contemplating purchasing new equipment
or changing their existing business model in the wake of new or
heightened environmental regulation, it is important to note that
several states provide tax exemptions for various pollution control
equipment that may ease this transition.
In Kentucky, until 2018, the state offered both a sales tax
exemption for the purchase of pollution control equipment, as well
as an income tax benefit; however, both were eliminated during the
sweeping 2018 state tax reform legislation. Today, Kentucky still
provides a significant property tax benefit for equipment that is
used for the primary purpose of “pollution control.” KRS
132.200(8) provides that tangible personal property that is
certified as a “pollution control facility” is exempt
from all local tax (i.e., county, city, school) and is
subject only to Kentucky’s state-level tax at a reduced
rate.
While the statute uses the phrase “pollution control
facilities,” the exemption is applied broadly. Not only can
buildings qualify, but also a broad range of equipment, component
parts, and appliances, in a variety of industries, so long as the
equipment is used to prevent, control, or reduce air, water, sound,
or waste pollution.
Kentucky Administrative Regulation 103 KAR 30:2601
provides guidance for the process and implications of seeking a
pollution control exemption. In order to qualify for the exemption,
the taxpayer must file an application with the Kentucky Department
of Revenue and submit various documentation related to the
equipment, as well as the pollution it aims at eliminating or
controlling (e.g., air, water, sound, and waste).
Once all of the above is submitted, the Department will take the
Application under consideration and may also request additional
information/documentation prior to making a determination. If
approved, the exemption becomes effective on the date the
application is submitted to the Department, not when the Department
issues the certificate, and importantly, not retroactive to the
date of purchase if made before the application. Therefore, the
taxpayer can effectively benefit from the moment the application is
submitted and is not disadvantaged if the Department’s
application review time becomes lengthy.2
Kentucky is not an outlier in this area of tax law. Other states
have adopted similar tax exemptions for pollution control
equipment. While many vary on the type of pollution control
equipment that can qualify for an exemption, as well as the type of
tax it is exempted from, several states have statutory language
that is similar to those in Kentucky.
Ohio provides a similar property tax exemption for air pollution
control facilities, energy conversion equipment that converts power
usage from natural gas to alternative fuel, noise pollution control
equipment, equipment used for solid waste energy conversion,
thermal efficiency improvement equipment, and equipment used for
water pollution control.3 Further, Ohio protects the
transfer of pollution control equipment from sales tax as well.
Pursuant to Ohio Rev. Code Ann. § 5709.25, the transfer of
tangible personal property to a holder of an exempt pollution
control facility certificate is not recognized as a sale if the
property that was transferred is incorporated in the pollution
control facility. Like Kentucky, a taxpayer must apply for a
pollution control exemption certificate from the Ohio Department of
Taxation in order to utilize the tax benefits.
Tennessee is similar to Kentucky in terms of its property tax
benefit for pollution control equipment in that it still taxes the
property; however, it provides a reduced state rate.4
Unlike Kentucky, Tennessee provides a sales tax exemption for any
“chemicals and supplies” used for pollution control
purposes in an air or water pollution control facility.5
Depending on what a business classifies as pollution control
facilities, this exemption could apply to a variety of
supplies.
Indiana provides more broad exemptions from both property and
its gross retail tax for pollution control equipment. Pursuant to
Indiana law, if the taxpayer is in the business of manufacturing,
processing, refining, mining, recycling or agriculture and
purchases property that is incorporated into or consumed by a
pollution control facility/equipment acquired for compliance with
any state, local, or federal environmental quality statute,
regulations, or standards, it can deduct 100% of the sales price
from the taxpayer’s gross retail and use tax
liability.6 Additionally, Indiana provides a property
tax exemption for an “industrial waste control facility,”
meaning personal property which is used by a manufacturing or coal
mining operation and is used to prevent, reduce, or eliminate water
pollution or used to meet federal reclamation standards for a coal
mining operation.7
Texas is another state that provides both a sales tax and
property tax benefit for various pollution control equipment. In
relation to sales and use tax, labor incurred to repair, remodel,
maintain, or restore tangible personal property is exempted if the
repair/remodel is required by statute, ordinance, order, rule, or
regulation in order to protect the environment or to conserve
energy.8 However, the labor charge must be separately
itemized as the equipment itself is still subject to sales and use
tax. Texas additionally provides a fairly broad property tax
exemption for both real and tangible property if it is used wholly
or partly as a facility, device, or method for the control of air,
water or land pollution.9
As industries may be faced with new or renewed environmental
regulations in the coming years, it is important to check state and
local tax exemptions to ensure any new purchases of equipment could
qualify for various tax benefits. If interested in applying for a
state pollution control tax exemption certificate, or for more
information about your state and federal taxes, contact Elizabeth Moseley or any attorney with Frost
Brown Todd’s Tax practice group.
Footnotes
1 As revised and effective as of November 1,
2019.
2 It should also be noted that often equipment that
previous would have qualified as exempt pollution control equipment
from Kentucky sales and use tax can often qualify for the new and
expanded industry sales tax exemption provided to various
manufacturing equipment.
3 Ohio Rev. Code Ann. § 5709.20
4 Tenn. Code Ann. §67-5-604
5 Tenn. Code Ann. § 67-6-329(a)(19)
6 Ind. Code § 6-2.5-5-30
7 Ind. Code §6-1.1-10-9
8 Tex. Tax Code Ann. § 151.338
9 Tex. Tax Code Ann. § 11.31
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.