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Both renewable energy market participants and taxing
jurisdictions in New York State have long been bedeviled by
inconsistent and unclear real property tax policy and assessments.
A recent decision from the State’s appellate court could have
helped clarify the confusion, but stopped short of doing so.
In Cornell Univ. v. Bd. of Assessment Review and Shana Jo
Hilton, as Assessor of the Town of Seneca, New York, 186
A.D.3d 990 (4th Dep’t 2020), a case in which Cornell contended
that a solar facility developed on its land was personal property,
not real, and therefore not taxable, the Fourth Department
Appellate Court instead held that solar energy systems are properly
classified as taxable real property. The decision did not, as some
in New York’s solar market hoped it might, address how such
systems should be assessed or whether different components of the
solar facility should be treated differently – that is,
whether the solar panels themselves, which the Internal Revenue
Service has categorized as removable, personal property,1 are
real property, or whether only the racking and portions affixed to
the ground should be designated as such. The Fourth Department also
did not address an issue raised by the lower court – that an
individual municipality that prohibits permanent affixing of the
system to the ground by mandating decommissioning cannot declare
that equipment to be permanent real property. Thus, uncertainty
still reigns.
Background
The underlying litigation arose when Cornell University
(“Cornell”) brought a proceeding under Real Property Tax
Law Article 7 challenging the Town of Seneca’s taxable
assessment of a solar energy system that was owned by a
third-party, Argos Solar, LLC (“Argos”), who was not a
party to the litigation.
As all solar systems do, this one consisted of solar panels,
wires, a racking system, inverters, poles or pilings, a control
system, and a concrete pad on which the equipment sat. The system
was described by the developer as designed for disassembly and
removal at the end of the contract term. All that was required for
removal was unbolting and unplugging the panels, disassembly of the
racks, and carting the equipment away. Following disassembly and
removal, the equipment could be reused.
Cornell offered two primary arguments why the system was not
taxable: (1) that Cornell is a tax-exempt educational institution;
and (2) that the system constitutes personal property, not real
property. In response, the Town of Seneca (the “Town”)
contended that (i) although Cornell is tax-exempt, the system was
owned by Argos, a for-profit entity, and (ii) that the system met
the definition of “real property” because it was intended
to be permanently affixed to the ground. The lower court had
rejected the Town’s arguments and held the System was not
taxable, primarily finding that the system should be deemed
effectively owned by Cornell, a non-profit, and thus tax exempt. In
dicta, the Court also noted the inconsistency between a town
requiring a solar system to be removed and taxing it as a permanent
fixture.
The Appeal
On appeal, the Town prevailed in its argument that the system
was a fixture and therefore was real property. The Town also
contended that Cornell’s tax-exempt status did not prohibit
taxation of the system because it is owned by Argos and not
Cornell. As to the first issue, the appeals court held that the
system is a fixture under both the Real Property Tax Law and common
law, and therefore subject to real property taxation. Without
addressing the potentially different status of the various
components of the system, the Court held that the System is a
fixture as defined by Real Property Tax Law § 102(12)(b),
which provides that real property includes “(b)uildings and
other articles and structures, substructures and superstructures
erected upon, under or above the land, or affixed
thereto.”
Furthermore, the Court held that the system met all three
elements of the common law fixtures test – annexation,
adaptation, and intention. The system consisted of “nearly
1,600 piles driven directly into the ground and nearly 400 piles
set on footings of concrete.” The system and associated
equipment were attached by nuts and bolts and installed on a
concrete slab. Collectively, the manner in which the System was
installed, the court held, confirmed that it was “annexed to
the real property.”
The Court also held that the second element of the common law
fixtures test was met insofar as the system applied to the use and
purpose of the land, which was dedicated to generating solar energy
as part of the sustainability efforts and educational mission of
Cornell.
Finally, the Court held that the third element of the test was
met because the power purchase agreement between Cornell and Argos
demonstrated that they desired and intended the system to be
permanent for the term of the agreement. Notably, the removable
nature of the system was not only required by the agreement, but
was a condition of the Town Planning Board approval of the system
installation at Cornell.
Cornell’s Tax-Exempt Status Does Not Change the
Analysis
While there was no dispute that Cornell is a tax-exempt
educational institution, the Court reasoned that its exempt status
did not impact its determination that the system constituted
taxable real property. The agreement between Cornell and Argos
separated ownership of the land from that of the system, and Argos
is responsible for removal of the system and all taxes associated
with ownership of it. Cornell has the option of purchasing the
system at the end of the term of the agreement. Therefore, Cornell
lacks the necessary level of “dominion and control” over
the System to exempt the System from taxation.
Hodgson Russ Insights
The Court’s holding in this case unfortunately does not
improve the current New York state of affairs with respect to real
property taxation of renewable energy installations. Cornell has
filed for re-argument and leave to appeal to the New York State
Court of Appeals, but the primary issues facing the industry are
unlikely to be resolved there.
While most assessors are using the income capitalization
approach, an effort to confirm that methodology as appropriate for
renewable energy systems did not survive the last budget process,
nor did an effort at centralizing determination of capitalization
rates. Thus some assessors are still pushing the cost methodology
despite it being disfavored by the courts. And numerous assessors
are including intangible assets like environmental attributes in
the income capitalization approach even though these are not real
property income streams under New York law.
The limitations of this holding only further highlight the need
for the legislature to bring certainty to the assessment of
renewable energy projects. Unless the legislature either enacts a
law that classifies components of a system as personal property or
the State establishes a required PILOT amount or assessment
methodology that fairly values the real property components of
renewable energy and storage systems, taxing jurisdictions will
continue to assess projects ad hoc. Furthermore, legislative action
addressing the methodology for determining the taxable value of
these projects will bring much needed clarity to project developers
and municipalities alike, potentially avoiding protracted
litigation.
Footnote
1. 26 CFR § 1.856-10(g); Internal Revenue
Bulletin: 2016-29, Example 8 (“The Treasury
Department and the IRS have concluded that PV modules and inverters
that are used in the generation of energy for sale to third parties
do not qualify as (inherently permanent structures)…”).
Originally published September 22, 2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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