While about 100 environmental rules and guidelines were withdrawn or changed during the business-minded Trump administration, President Biden has made clear his intention to reintroduce many of the Obama-era environmental protection measures that have been weakened or eliminated over the past four years. In his first few hours in office, President Biden executive ordered the Environmental Protection Agency (EPA) to review several of its rules and regulations. This is in addition to other environmental efforts, such as the United States’ renewed commitment to the Paris Agreement. With the main focus on reducing greenhouse gas emissions and other various air, water and soil pollutants, many industries should expect increased requirements and an environmental impact review in the course of the Biden administration.
As some companies may consider buying new equipment or changing their existing business model with new or tightened environmental regulations, it is important to note that several states are providing tax exemptions for various emission control devices that could facilitate this transition.
In Kentucky, the state offered both a sales tax exemption for the purchase of environmental protection equipment and an income tax break through 2018; However, both were eliminated during the state’s 2018 comprehensive tax reform legislation. Today, Kentucky continues to offer significant property tax benefits for equipment primarily used for “pollution control” purposes. KRS 132.200 (8) provides that physical personal property certified as a “pollution control facility” is exempt from all local taxes (ie, county, city, school) and is only subject to Kentucky state tax at a reduced rate.
While the law uses the term “pollution control devices”, the exception is broad. Not only buildings can be qualified, but a wide range of devices, components and devices in a wide variety of industries, as long as the devices are used to prevent, control or reduce air, water, sound or waste pollution.
Kentucky Administrative Regulation 103 KAR 30: 2601 provides guidance on the process and implications of applying for a pollution release. To qualify for tax exemption, the taxpayer must file an application with the Kentucky Department of Revenue and submit various records relating to the equipment and pollution it is designed to remove or control (e.g. air, water, noise, and waste) .
Once all of the above has been submitted, the department will review the present application and may also request additional information / documentation before making a decision. If approved, the exemption will take effect on the day the application is submitted to the department, not when the department issues the certificate, and especially not retrospectively from the date of purchase if it was made prior to the application. Therefore, the taxpayer can benefit effectively from the time of filing the application and will not be penalized if the ministry’s application review time becomes lengthy
Kentucky is not an outlier in this area of tax law. Other states have introduced similar tax exemptions for emission control devices. While many differ in terms of the types of pollution control equipment that may be eligible for an exemption and the type of tax they are exempt from, several states have similar legal language to Kentucky.
Ohio offers similar property tax exemptions for air pollution control plants, energy conversion plants that convert electricity consumption from natural gas to alternative fuel, noise abatement plants, solid waste energy conversion plants, thermal efficiency improvement plants, and water pollution control plants Ohio also includes the transfer of pollution control equipment before sales tax. According to Ohio Rev. Code Ann. Section 5709.25, the transfer of personal items to a holder of an exempted pollution control system certificate is not recognized as a sale if the transferred property is incorporated into the pollution control system. As in Kentucky, a taxpayer must apply to the Ohio Department of Taxation for a Pollution Exemption Certificate in order to take advantage of the tax benefits.
Tennessee is similar to Kentucky for its environmental equipment property tax breaks in that it continues to tax the property; It does, however, offer a reduced state tax rate.4 Unlike Kentucky, Tennessee offers a sales tax exemption for all “chemicals and consumables” used in an air or water purification facility for air purification purposes.5 Depending on what a company classifies as pollution control facilities this exception could apply to a large number of deliveries.
Indiana offers broader exemptions from both property tax and gross retail tax on pollution equipment. Under Indiana’s law, if the taxpayer is manufacturing, processing, refining, mining, recycling, or farming and acquires property that is incorporated into or consumed by an environmental protection facility / facility that is required to comply with state, local or federal law, regulation, or environmental quality standard may have 100% of the sale price deducted from the taxpayer’s gross retail and use tax liability.6 Indiana also offers property tax exemption for an “industrial waste control facility,” that is, owned by a manufacturing or Coal mining operation is used and is used to prevent, reduce or eliminate water pollution or is used to meet federal reclamation standards for a coal mining operation. 7
Texas is another state that offers both sales tax and property tax breaks on various environmental protection equipment. With respect to sales tax and use tax, the work involved in the repair, remodeling, maintenance or restoration of tangible personal property is exempt if the repair / remodeling is by law, ordinance, ordinance, rule or ordinance to protect the environment or to save energy.8 However, the workload must be shown separately, as the devices themselves are still subject to sales tax. Texas also offers relatively extensive property tax exemptions for both real estate and tangible property when used in whole or in part as a device, device, or method to control air, water, or soil pollution
As industries could potentially face new or revamped environmental regulations in the coming years, it is important to review state and local tax exemptions to ensure that various tax breaks are eligible for new equipment purchases. To apply for a state pollution tax exemption certificate or for more information about your state and state taxes, contact Elizabeth Moseley or an attorney in the Frost Brown Todd Tax Practice Group.
Footnotes
1 In the revised version with effect from November 1, 2019.
It should also be noted that often devices that would previously have qualified as Kentucky Sales and Use Tax Exempt Emission Control Devices will often qualify for the new and expanded industrial sales tax exemption for various manufacturing facilities.
3 Ohio Rev. Code Ann. Section 5709.20
4 tenn. Code Ann. §67-5-604
5 ten. 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
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.