Wind Energy Production Tax
September 2009
The development of wind energy conversion systems has grown significantly over the past decade in Minnesota due to market demand for electricity, federal and state legislation, subsidy programs, attractive financing, and economic opportunities for property owners. According to the Department of Revenue, there are more than 165 companies reporting wind energy production today compared to about 20 companies that reported production in 2002. These companies pay a wind energy production tax each year based on their tower locations and total production capacity. It is a personal property tax somewhat like other personal property taxes, generating tax revenues for the local government units. The land areas supporting these wind energy conversion systems are taxed to each parcel as real property to their fee owners. They are valued the same as other land that has not been improved with wind energy conversion systems and are classified for tax purposes according to their most probable use as unimproved.
What is a wind energy production tax?
This in-lieu of personal property tax replaced the general ad valorem property tax in 2003. It is a tax imposed on the production of electricity from a wind energy conversion system and is treated as a personal property tax for purposes of payment and collection. Each company pays a tax on the amount of wind energy produced during the previous calendar year based upon a report submitted to the Department of Revenue by February 1st. This information and the basis of apportionment are reviewed by the Commissioner of Revenue and a tax calculated on the company’s scale of production consistent with a schedule prescribed by law. If a company does not offer the report in a timely manner, the tax is computed on the total capacity of the system at a production rate of 40 percent. The Commissioner of Revenue sends a notification to both the company and county on or before February 28th of the amount due. At that time, the county bills the company and collects the tax on or before May 15th and October 15th. The tax is then distributed to all taxing districts in a similar manner as the property tax with 80 percent going to the county, 20 percent to the city or township, and 0 percent going to the school district.
What is a wind energy conversion system?
The law defines a wind energy conversion system as any device, like a wind charger, windmill, or wind turbine which converts wind energy to a form of usable energy. It also includes a substation that is used and owned by one or more wind energy conversion facilities. A large scale system is described as a wind energy conversion system of more than 12 megawatts as measured by the nameplate capacity of the system or as combined with other systems; a medium scale system means a wind energy conversion system of over 2 and not more than 12 megawatts as measured by the nameplate capacity of the system or as combined with other systems; and a small scale system is characterized as a wind energy conversion system of less than 2 megawatts but greater than .25 megawatts as measured by the nameplate capacity or as combined with other systems.
Do all wind energy conversion systems pay a wind energy production tax based upon a standard fixed rate?
No, the tax due varies according to the type and size of the wind energy conversion system. The local production tax rate is .12 cents per kilowatt hour of electricity produced by large scale systems, .036 cents per kilowatt hour of electricity generated by medium scale systems, and .012 cents per kilowatt hour of electricity made by small scale systems between 2 megawatts and .25 megawatts. Wind energy conversion systems with the capacity of less than .25 megawatts and systems with a capacity of 2 megawatts or less that are owned by a political subdivision are exempt from the production tax. Additionally, a wind energy conversion system qualifying as Job Zone property does not pay a production tax for the duration of the zone. The applicable rates are adjusted for inflation by the Commissioner of Revenue.
Is there an alternative method of property taxation that can be applied to a wind energy conversion system?
Yes, a company may negotiate with the county to establish a payment in lieu of the wind energy production tax. This payment must cover fees and compensation to the county and city or township where the facility is located to maintain the public infrastructure and services. It may be based on production capacity, historical production, or other factors agreed upon by the parties. The in lieu of tax agreement must also be signed by all parties and filed with the Commissioner of Revenue and county recorder. This exemption from the production tax is effective for the same duration as the payments are in effect.
How is land supporting a wind energy conversion system treated for taxation purposes?
The land area that supports a wind tower, its auxiliary improvements, and a road is taxable as real property to the fee owner. The law implies that the property tax classification must be based on the most probable use of the property if it were not improved with a wind energy conversion system, but the valuation methodology used is at the discretion of the county assessor. For instance, a wind tower site located in a corn field would be properly classified as agricultural for tax purposes, but its value would be like commercial/industrial or other types of property not used for agricultural purposes. In other words, the value of a wind tower site would be comparable to the value established for some communication tower and billboard sites.