A PILOT Agreement Can Take the Sting Out of Personal Property Taxes
In Maryland, solar equipment is treated as personal property, and due to the capital intensive nature of solar power projects, personal property taxes can be a significant obstacle to the economic feasibility of such a project. Fortunately, Maryland law affords some relief in this area, if you know what to do.
Under Maryland law, personal property generally is assessed at its original cost, and then is depreciated annually based upon the type of property. Unlike for federal income tax purposes, personal property is never fully depreciated for property tax purposes, but rather, is taxed subject to a minimum percentage of the original cost. Long-lived electric generation machinery and equipment of nonutility entities that generate electricity for sale is depreciated at three and one-third percent (3 1/3%) each year, and such equipment may not be depreciated below twenty-five percent (25%) of the original cost. After the assessment has been determined by the State of Maryland, a particular county will then issue a personal property tax bill based upon that county’s tax rate, which can be as high as $2.75 per $100 of assessed value.
Maryland law provides some relief for solar power projects, as personal property that constitutes machinery or equipment used to generate electricity for sale is subject to personal property tax on only fifty percent of its value. However, even with this relief, the owner of a solar power project may struggle with cash flow projections, particularly in the early years of the project.
Fortunately, again, Maryland law creates the potential for additional relief by allowing the governing body of a county to enter into an agreement with the owner of a facility for the generation of electricity located in the county for a negotiated payment by the owner in lieu of taxes on the facility. This payment-in-lieu-of-taxes agreement is often referred to as a “PILOT” agreement. A PILOT agreement allows a county to promote the generation of renewable energy within the county, while at the same time, helps the owner of the facility to make the project financially viable.
If a Maryland county and the owner of facility agree to enter into a PILOT agreement, then the agreement shall provide, for the agreed-upon term specified in the Agreement, that the owner shall pay to the county a specified amount each year in lieu of the payment of county personal property tax, and all or a specified part of the personal property at the facility shall be exempt from county property tax for the term of the agreement. A PILOT agreement may also apply with respect to real property tax in the event the owner of the project also owns the underlying real estate.
Maryland’s PILOT statute provides a project owner with the potential to lessen the property tax burden for the project, thereby making the project financially viable, particularly in the early years of the project. Maryland’s PILOT statute also allows a county to attract new investment of renewable energy within the county.
While the authority for a county to enter into a PILOT agreement originates from the Maryland Code, it is important that a facility owner, before executing a PILOT agreement, confirm that the particular county has properly undertaken the procedures such that the PILOT agreement is enforceable against the county. This will require the facility owner to confirm that the county officials acted in accordance with the applicable county code in resolving to approve, and execute, the PILOT agreement.
If you have questions about PILOT agreements or are about to engage in discussions with a county to negotiate such an agreement, please contact Doug Coats at Gordon Feinblatt LLC at (410) 576-4002 or firstname.lastname@example.org.
February 17, 2017