Solar farm investors say state’s tax collector is shaking business confidence in NC
Thanks to a generous tax credit, North Carolina became one of the nation’s leaders in solar energy. Now many of the investors who fueled its boom are being audited by the state’s tax collector.
A group of prominent North Carolina businesses and individuals is warning that the audits are eroding the state’s standing as a reliable place to invest money.
In a letter to Gov. Roy Cooper, the group says that the state Department of Revenue’s treatment of investors who used North Carolina’s Renewable Energy Tax Credit could place a chill on future use of North Carolina tax credits.
Sent by the N.C. Chamber, the letter argues that the Department of Revenue (DOR) has unfairly reinterpreted the rules around who can use the program well after the state has benefited from the creation of hundreds of solar projects.
At issue is whether members of partnerships can claim the tax credit. The revenue department has concluded that many investments likely no longer count because the state should have been applying federal rules that disqualify credits transferred from a partnership to its investors.
But the decision to apply federal tax laws to the credits was a shock to the business community. In an opinion piece for Bloomberg Tax last year, Kay Hobart, a Raleigh lawyer for Parker Poe, wrote that DOR’s ruling on partnerships was “a new and extremely restrictive interpretation that is taking investors, developers, and the market by surprise.”
Hobart, who previously represented DOR as a lawyer, added that the ruling appeared at odds with the General Assembly’s original intention and a misread of a 2017 state Supreme Court case.
Since 2018, however, DOR has opened audits into hundreds of individuals and businesses who invested in projects through partnerships. The Chamber’s letter says millions of dollars are at stake for individuals and companies who “invested in our state in good faith ... only to see DOR try to change the rules of the game after the clock ran out.”
The letter is signed by many prominent people, including former Bank of America CEO Hugh McColl and former Belk CEO Tim Belk, as well as a long list of insurance companies that invested in solar projects in the state.
Credit leads to NC solar boom
Until 2016, North Carolina offered a tax credit to investors in renewable energy projects in the state — most notably the numerous solar farms that now dot the state’s rural landscape.
The incentive, which was originally created in 1977, allowed a taxpayer that has constructed, purchased or leased a renewable energy installation to take a tax credit equal to 35% of the cost of the installation. The credit could be used to offset income taxes and, importantly, gross premium taxes, which provided a big incentive for insurance companies to invest in solar installations.
The credit became hugely popular, with the state handing out nearly $1 billion in tax breaks, The News & Observer previously reported. In turn, North Carolina vaulted to second place nationally in total solar energy capacity, despite fewer geographic advantages than many Western states.
The tax credit ended in 2016, meaning most of the projects funded by the credit have been built, though taxpayers were given several more years to take the tax benefit. Now DOR is auditing many of the individuals who took advantage of the credit.
Without the tax credit, Strata Solar, one of the state’s largest solar energy companies, could never have grown as it did. Founded in 2008, the solar company employs more than 2,000 people and recently opened a new headquarters in downtown Durham.
But the audits could hamper its growth in North Carolina, the company’s CEO Markus Wilhelm said.
“The solar industry has created thousands of permanent jobs while helping to establish North Carolina as one of the top centers for this new industry,” Wilhelm said in an email. “Because these audits are challenging nearly every investment in renewable energy and historic preservation, companies like Strata will have trouble convincing investors to trust North Carolina in the future.”
Winding through court
Schorr Johnson, a spokesman for DOR, said his agency’s interpretation of the law has been backed up in court.
There are several lawsuits going through state court at the moment challenging DOR, including ones that involve the N.C. Farm Bureau and Monarch Private Capital, a tax-credit broker based in Georgia whose partnerships invested in hundreds of millions of dollars worth of projects.
“A court recently held that the Department properly determined that the existing statute does not allow a taxpayer to claim these credits when the facts demonstrated that the taxpayer solely intended to acquire tax credits, not to invest in renewable energy projects,” Johnson said in a statement. “The Department is required to follow the existing statute governing renewable energy tax credits unless and until the General Assembly changes the law.”
Joseph S. Dowdy, a Raleigh-based lawyer for Monarch, said he believes DOR is misapplying federal law and that there’s a good chance the lawsuits will end up at the N.C. Supreme Court, a process that could take more than a year.
Gov. Cooper’s office says it hopes there can be “finality and stability on this issue soon.”
“The Governor supports legislative efforts to encourage investment in renewable energy, including through the use of tax credits,” spokesman Ford Porter said in a written statement. “The Department of Revenue is required to follow the law, as enacted by the General Assembly, and there are court actions pending that can help interpret how that law is enforced.”
Hurting future investments
In the meantime, Ray Starling, general counsel for the N.C. Chamber, believes the audits are hurting future investments in North Carolina tax credits, such as the Historic Rehabilitation Tax Credit and Mill Rehabilitation Tax Credit.
Those two tax credits have been used throughout the state to revamp aging downtowns and turn former textile mills into offices and apartments.
The success of these programs, he said, depends on the confidence that good-faith investments will ultimately earn credits. But the 2018 notice by DOR has shaken that confidence.
“We are now a first-in-class state for renewables, particularly for solar, and now we don’t want to honor the rules that got us there,” Starling said in a phone interview. “You have this weird scenario where we got exactly what the policymakers wanted and now we are retroactively saying I don’t know if these investments should count anymore.”
If the General Assembly were to create new tax credits for affordable housing or solar storage, he added, fewer people will take them if these audits aren’t resolved.
Thruston Morton, the former CEO of the Duke University Endowment, said that if investors start believing North Carolina is untrustworthy then it could dampen the appetite of future tax credits.
These investments, he noted, could easily have gone to other states with tax incentives, such as South Carolina.
“This is not just about renewable energy. This is about being able to trust the government,” Morton, whose solar tax credit investments are under audit, said in an interview. “This is widespread concern about the integrity of the state in being honorable about what they promoted and then summarily changing the rules after they got what they wanted.”
Morton said he doesn’t believe it is too late to restore confidence in the state.
“We want to find some graceful way to exit and unwind the damage (DOR) has done,” he said.
This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate
This story was originally published December 10, 2020 at 4:51 PM with the headline "Solar farm investors say state’s tax collector is shaking business confidence in NC."
