Tennessee: State Tax Implications of the American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (the Act) was passed by Congress on Friday, Feb. 13, 2009. The Act includes various energy-related tax incentives to encourage investment in “green” energy alternatives. These incentives, coupled with opportunities to obtain bond financing resources under the Act, such as Energy Conservation Bonds (See Tax-Exempt Bonds Key Component of Stimulus Package), will likely result in increased investment in these new technologies across the country.
 
For existing Tennessee businesses or businesses that are looking to relocate and make investments to qualify for the Act’s energy incentives, Tennessee’s tax incentives should be reviewed before any investments are made to determine whether state tax savings may also be available. Tennessee’s most often utilized incentives include the job tax credit, a very broadly applied industrial machinery exemption, a credit for facilities that support emerging industries (i.e. high skill, high wage, and high technology jobs), exemptions for pollution control equipment, credits for integrated suppliers, and specific exemptions for data centers. These incentives may be combined with the Federal incentives.
 
In the event that existing incentives are unavailable, there may be some opportunity to seek additional incentives from the State. It has been Tennessee’s practice in recent years to work very closely with businesses either relocating to the State or expanding facilities here. The State’s efforts to tailor existing incentives to lure investments (and new jobs) to Tennessee have resulted in recent successes with the Volkswagen Plant and the Hemlock Semiconductor Plant. It has typically been Tennessee’s preference to modify existing tax incentives, including the Job Tax Credit and the Industrial Machinery Exemption, to encourage investment in the State. An example of this was the 2007 enactment of incentives for data centers that included the data centers within the parameters of the sales tax exemptions applicable to manufacturers. In 2008, however, a completely new incentive was enacted that created a credit for “green” energy supply chain manufacturers. Thus, whether it is through modification of existing incentives or passage of new incentives, the Legislature has clearly exhibited a willingness to pass incentives to attract investment to Tennessee.
 
Notable energy incentives in the Act are discussed here, but some are summarized below: 
 
Advanced Energy Investment Credit.  The proposal establishes a new 30 percent investment tax credit for facilities engaged in the manufacture of advanced energy property. Credits are available only for projects certified by the Secretary of Treasury, in consultation with the Secretary of Energy, through a competitive bidding process. This incentive will likely overlap with Tennessee’s “green” energy supply chain manufacturers credit. The Act defines “advanced energy property” to include renewable power equipment, smart grid technology, carbon capture and storage equipment, energy storage, energy conservation, efficient transmission and distribution of electricity, and carbon capture and sequestration. Tennessee does not, by comparison, define “green energy” so that will allow the State some flexibility to determine whether Tennessee’s credit also applies.
 
Long-Term Extension and Modification of Renewable Energy Production Tax Credit.  Under current law, this credit is allowed for production of energy from qualified energy facilities based on a kilowatt-hour rate. Prior to the passage of the Act, facilities that generated electricity qualifying for the credit had to be placed in service by Jan. 1, 2010. The Act extends the placed-in-service date for wind facilities for three years (through Dec. 31, 2012). The proposal also extends the placed-in-service date through Dec. 31, 2013 for certain other qualifying facilities, including closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities.  
 
Temporary election to claim the investment tax credit in lieu of the production tax credit. Current law allows facilities producing electricity from solar facilities, geothermal, small wind, and other qualified sources to take a 30 percent investment tax credit in the year the facility is placed in service. The Act allows the qualified energy facilities described above to claim this investment tax credit, in lieu of the production credit set forth above, for property placed in service in 2009 through 2012 for small wind facilities and 2009 through 2013 for all other qualified facilities. The Act also removes the $4,000 cap in existing law for small wind energy property.
 
For those interested in how the Act may affect the application of Tennessee’s excise tax law, it remains to be seen how the State will react to the general provisions of the Act, including changes in cancellation of indebtedness. Tennessee has taken varying approaches to changes at the federal level. Like many states, Tennessee’s excise tax is statutorily decoupled from federal bonus depreciation. Tennessee, however, has not decoupled from the expense provisions of Section 179. Based on the amount of focus that has been placed on the Act, the State may choose not to decouple from changes in the Act that may impact Tennessee excise tax calculations. In addition, changes in the federal NOL provisions will have no impact on Tennessee excise tax as Tennessee does not allow for NOL carrybacks.