State Tax Credits Promoting Local Coal Use

Transcription

1 Chapter 12 Cite as 21 Energy & Min. L. Inst. ch. 12 (2001) State Tax Credits Promoting Local Coal Use John A. Mairs Jackson & Kelly PLLC Charleston, West Virginia Synopsis Introduction Ohio Tax Credits [1] Coal Tax Credit Virginia Tax Credits [1] Coal Employment and Production Incentive Tax Credit Kentucky Tax Credits [1] Coal Incentive Credit Maryland Tax Credits West Virginia Tax Credits [1] Proposed Small Coal Producer Tax Credit Conclusion Introduction. Three eastern coal-producing states, Maryland, Ohio and Virginia, have historically provided tax incentives to companies engaged in the business of generating electric power at coal-fired electric generating stations to encourage the use of in-state coal. During 1999 and 2000, there have been legislative changes affecting each of these credits. In Maryland, the general assembly increased the amount of credit which could be claimed by certain Maryland utilities and also extended the credits, which were due to expire on June 30, 2001, in perpetuity. In Ohio, the general assembly lowered the barriers to qualifying for the credit, increased the amount of the credit, and also provided for the use of the credit against the Ohio income and franchise tax following deregulation of the Ohio electric power industry. In Virginia, the general assembly amended their credit so that it will remain available after deregulation of the Virginia electric power industry, and also eliminated a loophole in the credit which allowed Virginia public utilities to receive the credit for purchasing coal for resale. In addition, during the 2000 legislative session, both Kentucky and West Virginia proposed new credits on increased use of in-state produced

2 12.02 ENERGY & MINERAL LAW INSTITUTE coal. Kentucky enacted legislation which provides a credit to electric power companies for increasing their use of Kentucky coal. The West Virginia legislation provided a credit for purchasing coal from small local producers, but this legislation did not pass. This article discusses the recent changes made to the various coal incentive tax credits currently in effect in the eastern coal producing states which provide public utilities tax credits for burning local coal Ohio Tax Credits. [1] Coal Tax Credit. Historically, the State of Ohio has provided Ohio electric power generators with a tax credit (the Ohio Coal Tax Credit ) against its Public Utility Excise Tax, as an incentive to burn coal mined from seams located in Ohio in its coal-fired electric generating plants. 1 The Ohio Public Utility Excise Tax is a 4.75 percent gross receipts tax on public utility services provided within the state. 2 For tax periods ending on or before December 31, 1999, the Ohio Coal Tax Credit was $1.00 per ton of Ohio coal burned at electric generating units where the following conditions were met: 1) The electric generating unit is owned or leased by the taxpayer; 2) At least 90 percent of the fuel burned at the electric generating unit is Ohio coal: provided, that in the case of a plant that burns coal in combination with another fuel, for the purpose of reducing pollution to comply with the Phase I acid rain control requirements under Title IV of the Clear Air Act Amendments of 1990, 3 (the Phase I Requirements ), at least 80 percent of the coal burned at the unit is Ohio coal; 3) A compliance facility is attached to, incorporated in, or used in conjunction with the electric generating unit; and, 1 Ohio Revised Code Ohio Revised Code Stat. 2584, 42 U.S.C.A

3 STATE TAX CREDITS ) Total credits claimed are limited to 20 percent of the cost of the compliance facility. For purposes of the credit, the term compliance facility means property that is designed, constructed, or installed, and used, at a coalfired electric generating facility for the primary purpose of complying with the Phase I Requirements, and that controls or limits emissions of sulfur or nitrogen compounds resulting from the combustion of coal through the removal or reduction of those compounds before, during, or after the combustion of the coal, but before the combustion products are emitted into the atmosphere. Compliance facility also includes any of the following: (1) A facility that removes sulfur compounds from coal before the combustion of the coal; (2) Modifications to the electric generating facility to accommodate the construction or operation, of the compliance facility; (3) A byproduct disposal facility, as defined in section of the Revised Code, that exclusively disposes of wastes produced by the compliance facility or by the generating unit; (4) Facilities or equipment that is acquired, constructed, or installed, and used, at a coal-fired electric generating facility exclusively for the purpose of handling the byproducts produced by the compliance facility or by the generating unit in or to which the compliance facility is incorporated. 4 Sub. H. B. 262, passed by the Ohio General Assembly on January 26, 2000, added flue gas desulfurization systems (installed after July 10, 1991) to the list of qualified environmental compliance facilities. Effective January 1, 2000, Am. H.B. 384 increased the Ohio Coal Credit to $3.00 per ton, and repealed several of the restrictions in the 4 Ohio Revised Code

4 12.02 ENERGY & MINERAL LAW INSTITUTE earlier version of the credit. Specifically, Am. H.B. 384 eliminated the requirements that: 1) at least 80 percent of the coal burned at a qualified electric generating station be Ohio coal; and, 2) total credits claimed are limited to 20 percent of cost of the associated compliance facility. The Electric Utility Deregulation Act (Am. Sub. S. B. 3), enacted by the Ohio General Assembly in 1999, deregulates the Ohio power industry. Effective January 1, 2002, the Electric Utility Deregulation Act exempts electric companies from the Public Utility Excise Tax and makes them subject to the Ohio Corporation Franchise Tax. 5 As part of this legislation, the General Assembly enacted Ohio Revised Code which, for tax periods beginning January 1, 2002, allows the Ohio Coal Credit to be used against the Ohio Corporate Franchise Tax. The recent changes to the Ohio Coal Tax Credit, have the potential to significantly stimulate the Ohio coal industry. The elimination of the credit cap, which under prior law limited the total amount of credit which could be claimed at any generating station to 20 percent of the cost of associated compliance facilities, and the retroactive expansion of the types of investments which qualify as compliance facilities should result in higher utilization of the credit at generating stations where the credit has historically been available. Of greater significance may be the repeal of the requirement that 90 percent (80 percent where the Ohio coal is burned in combination with another fuel, for the purpose of reducing pollution to comply with the Phase I Requirements) of total fuel burned at the generating station be Ohio coal. This change should significantly increase the number of generating stations which can qualify for the credit by allowing plants located in Ohio which have traditionally burned less than 90 percent Ohio coal to receive the credit. In addition, the elimination of the 90 percent 5 Chapter 5733 of the Ohio Revised Code. 426

5 STATE TAX CREDITS rule has opened the door to utilities which pay the Ohio Public Utility Excise Tax to receive the Ohio credit for burning Ohio coal in generating stations located outside the state. Finally, the increase in the amount of credit from $1 to $3 will increase the competitive edge which Ohio coal has over similar coal produced outside of the state. Non-Ohio coal producers may consider a legal challenge of the Ohio credit on the ground that it discriminates against interstate commerce by providing a direct commercial advantage to Ohio businesses. Ohio lost a similar challenge to a local sales tax credit to fuel dealers for ethanol produced in Ohio and sold as motor fuel in New Energy Company v. Limbach. 6 To date, no such action has been filed Virginia Tax Credits. [1] Coal Employment and Production Incentive Tax Credit. In 1986, the General Assembly of the Commonwealth of Virginia enacted the Coal Employment and Production Incentive Tax Credit (the Virginia Coal Credit ). 7 The Virginia Coal Credit is available to corporations in the Commonwealth in the business of furnishing water, heat, light or power and may be claimed against the Virginia license tax on public utilities, imposed by Virginia Code For tax years beginning on and after January 1, 1988, the amount of the credit was $1 per ton for each ton of coal mined in Virginia purchased by the taxpayer. The credit was increased to $2 per ton effective January 1, 1989 and increased to $3 per ton effective January 1, In 1999, the Virginia General Assembly enacted S. B. 1289, which deregulated the Virginia electric power industry. As part of that legislation, the General Assembly repealed the Virginia License Tax with respect to electric power companies, effective January 1, At that time, the 6 New Energy Co. v. Limbach, 486 U.S. 269, 100 L. Ed. 2d 302, 108 S. Ct (1988). 7 Va. Code Va. Code

6 12.04 ENERGY & MINERAL LAW INSTITUTE Virginia Coal Credit was amended so that in the future it can be claimed against the Virginia corporate net income tax liability. 9 Over the last several years there has been a controversy surrounding the use of the Virginia Coal Credit. One major electric producer in Virginia took the position that it was entitled to claim the credit with regard to Virginia coal which it purchased and resold to out-of-state power companies. It is the author s understanding that several Virginia coal producers objected to this activity, asserting that it gave the power company an unfair competitive advantage over other local coal producers in marketing Virginia coal. This issue was resolved on April 9, 2000, with the passage of H. B. 1135, which amended the Virginia Tax Credit to provide that, for tax years beginning on and after January 1, 2001, coal is required to be both purchased and consumed by the taxpayer in order to qualify for the credit. This change does not apply to coal sold pursuant to purchase contracts whose bid closing dates fell before the introduction date of the legislation Kentucky Tax Credits. [1] Coal Incentive Credit. The General Assembly of the Commonwealth of Kentucky has recently enacted a tax incentive designed to encourage electric power companies to increase their consumption of Kentucky coal. H.B. 805 (the Kentucky Coal Incentive Credit ) provides a tax credit to electric power companies (as defined in K.R.S. Chapter 136) and other entities that own or operate coal-fired electric generating plants. The Kentucky Coal Incentive Credit is authorized for 10 years, beginning July 15, The amount of the allowable credit is computed by multiplying the number of incentive tons of coal purchased and used by the taxpayer for the purpose of generating electricity by $2 per ton. Incentive tons are calculated as the number of tons of coal purchased by the taxpayer during the current year, upon which the Kentucky Coal Severance Tax (imposed by K.R.S. 9 See, Va. Code

7 STATE TAX CREDITS ) was paid by the producer, minus the tons of Kentucky Severance Tax paid coal purchased and used by the taxpayer to generate electricity during the twelve calendar months ending December 31, For taxpayers which come into existence after December 31,1999, the base year amount is set equal to zero. However, no existing company may create an affiliate or subsidiary for the purpose of qualifying for the zero base year amount. Taxpayers qualifying for the Kentucky Coal Incentive Tax Credit are eligible to apply the credit against their liability for the following taxes, in consecutive order: Corporation Income Tax, 10 Individual Income Tax,, 11 Corporation License Tax, 12 and Public Service Corporation Property Tax Maryland Tax Credits. Since 1989, Section 8-406(b) of the Annotated Code of Maryland has provided a $3.00 per ton credit against the Maryland Public Service Company Franchise Tax (Md. Code 8-402) for each ton of Maryland mined coal purchased by a public service company during the calendar year, in excess of the number of tons of Maryland mined coal that the public service company purchased in The term public service company is defined in Maryland Code as a person: (1) engaged in a telephone business in the State; or (2) engaged in the transmission, distribution, or delivery of electricity or natural gas in the State. In addition, Maryland Code provides a similar $3.00 per ton credit to qualifying co-generators and qualifying small power producers, as defined in the Public Utility Regulatory Policies Act of The credit available to co-generators and small power producers can be used to offset these taxpayer s Maryland income tax liability. Both of these credits were set to expire on June 30, K.R.S K.R.S K.R.S K.R.S

8 12.06 ENERGY & MINERAL LAW INSTITUTE On April 5, 2000, the Maryland General Assembly passed H.B. 729 which extends these credits in perpetuity and more importantly eliminates the requirement that only purchased tons in excess of 1986 base year amounts of Maryland coal can qualify for the credit. As a result of the 2000 legislative changes, public service companies, co-generators and small power producers subject to tax in Maryland can obtain the $3.00 per ton credit for any Maryland mined coal purchased during the taxable year. The Maryland Coal Credits are worded in a manner similar to the way Virginia s credit was worded prior to the 2000 amendments. Specifically, they require the public utility, co-generator or small power producer to purchase coal to receive the credit. Given the present language of the Maryland statutes, it appears that Maryland public service companies, perhaps including telephone companies, could begin brokering coal mined in Maryland but consumed in power plants located outside the state for the purpose of obtaining the benefit of the Maryland coal credit West Virginia Tax Credits (Proposed). [1] Proposed Small Coal Producer Tax Credit. House Bill 4602 was introduced during the 2000 legislative session to provide a $3.00 per ton credit, against West Virginia Corporation Net Income Tax liability, to corporations generating electricity using coal produced from a small mining operation in West Virginia. Any excess credits not usable by the taxpayer during the taxable year in which the credit was earned would be carried forward for five years or until the credit is used, whichever occurs first. House Bill 4602 defines small mining operation as either (1) West Virginia mines operated by operators who establish that their probable total annual coal production from all locations during any 12-month period, either during the term of a mining permit or during the first five years after issuance of the permit, will not exceed 300,000 tons; or (2) who otherwise qualify for the Small Operator Assistance Program under the Federal Surface Mining Control and Reclamation Act of Although this bill was introduced during the 2000 legislative session, it did not pass before the Legislature adjourned sine die on March 12,

9 STATE TAX CREDITS Conclusion. At this time, it appears that the trend to provide public utilities an incentive to increase consumption of local coal will continue in the near future. It is possible that the West Virginia tax incentive will be reintroduced in the 2001 legislative session. It is also possible that the Maryland and Kentucky general assemblies may further modify their coal incentive credits as a result of the deregulation of the power industry in those states. In the future one or more of these tax credits may be challenged by coal producers in states which do not have tax credits on the basis that such taxes discriminate against interstate commerce by providing a direct commercial benefit to local taxpayers. Finally, other states such as Pennsylvania, Indiana and Illinois face increased competition from western states and states which have these coal incentive credits, may also consider this type of legislation. 431