Gimme Shelter

Over the past few years, fears about the deteriorating environment have led to a rash of laws and regulations that have raised the heat on corporate management. Calls for regulating air emissions and wastewater discharges have often forced companies to make significant capital improvements in order to be in compliance - costs that have eaten into the bottom line.

The simple truth is that most companies can reduce the cost of installing and using pollution control equipment by taking advantage of hidden tax benefits. The reason: many states soften the pain of compliance with tax incentives that can help boost the bottom line over the long term.

For most companies, the key involves two tasks. The first is to understand how local state laws define pollution control equipment. The second is for these companies to find out how to avail themselves of the state and local tax benefits. The result can often translate into significant bottom-line savings.

Just What Is Pollution Control Equipment?

Pollution control generally falls into three categories: air, solid waste (including water) and noise. Overall, the definitions of pollution control equipment are fairly broad, which can benefit taxpayers.

For instance, Indiana defines an air pollution control system as "tangible personal property designed and used to improve public health and welfare by preventing or eliminating air contamination caused by industrial waste or contaminants."

Similarly, Ohio defines an industrial water pollution control facility in the following manner:

"Any disposal system or any treatment works, pretreatment works, appliance, equipment, machinery, pipeline or conduit, pumping station, force main, or installation constricted, used, or placed in operation primarily for the purpose of collecting or conducting industrial waste to a point of disposal or treatment; reducing, controlling or eliminating the discharge into a disposal system of industrial waste or what would be industrial waste if discharged into the waters of the state."

Some states add more potential tax incentive benefits by including a definition on noise pollution, stipulating that the equipment must aid in the "elimination or reduction of industrial noise levels."

These air, water and noise pollution control definitions are broad enough to yield substantial potential tax benefits, but the rules can vary from each state or local tax jurisdiction. In addition, many states require pollution control equipment to be certified by a state environmental oversight agency before it is eligible for tax benefits. This means that it is up to companies to determine whether certification is necessary and to identify which incentives may be applicable.

What Tax Benefits Apply?

While state exemptions and credits differ, tax incentives typically fall into three basic categories: real and personal property taxes; sales and use taxes; and income and franchise taxes. The following is a brief examination of each area.

Real and Personal Property Tax

All states tax real property and approximately 40 states tax business personal property. Many states have exemptions from real and/or personal property taxes for pollution control assets that are applied as a deduction from the assessed value.

For example, if an organization has a business personal property assessed value of $10 million, which incorrectly includes an exempt filtration system with an assessed value of $1 million, the corrected assessed value would be $9 million. The actual tax dollars saved could be calculated by multiplying the exempt portion ($1 million) by the appropriate tax rate - in this scenario (.02) - for a benefit of $20,000. See Table 1.

Table 1

Property Tax Savings

Property Tax Exemption

Assessed value of all business personal property

$10,000,000

Less incorrect assessment

(1,000,000)

Corrected assessed value

$ 9,000,000

Property Tax Benefit

Filtration system value exempted from total assessed value

$ 1,000,000

Tax rate/mileage

.02

Tax dollars saved

$ 20,000

Sales and Use Tax

Forty-five states and the District of Columbia impose some form of tax on sales transactions. Generally, these taxes are imposed on or passed through to the purchaser and are measured by the retail value of the goods sold. States provide numerous exemptions from sales and use taxes, including exemptions for manufacturing equipment and research and development equipment. Many states also exempt the purchase of pollution control equipment from sales tax. The exemption has the effect of reducing the cost of the equipment by the amount of sales tax that would have otherwise been paid on its purchase. For example, if the filtration system referenced in Table 1 had been purchased for $1 million in a state that has a six percent sales tax, the exemption would actually be worth $60,000.

State Income and Franchise Taxes

Forty-six states and the District of Columbia impose some form of tax on corporate income. Washington state imposes a business & occupation tax, which is measured by gross receipts. Pollution control equipment benefits for state income and franchise tax purposes usually take the form of a credit or deduction on an organization's annual tax return; however, such benefits generally are limited in nature.

In states that impose a tax measured solely on income, pollution control equipment income tax benefits may be nonexistent while states imposing a franchise tax that contains a net worth component may be more likely to allow such exemptions. The underlying reason for such policies is clear. Namely, a business' pollution control operations generally do not generate income and, given that lack of connection between the income tax base and the pollution control equipment, to allow a deduction or exemption for income tax purposes would be incongruous. Nevertheless, opportunities do exist and can result in significant state tax savings.

In states with franchise taxes based on the capital or net worth of a company, companies are often allowed to reduce the capital or net worth tax base by the cost of pollution control equipment. For example, if the net worth tax base of a company in a particular state was $10 million and the cost of the pollution control equipment $1 million, the franchise tax base would be $9 million and assuming a .2 percent tax rate, the benefit of the exemption $2,000.

The chart in Table 2 summarizes the availability of pollution control equipment tax incentives for purposes of real and/or personal property, sales, and income and franchise taxes on a state-by-state basis.

Table 2

State-by-State Summary of Potential Tax Incentives

(Check your local jurisdiction, as the rules may vary or change.)

State

Real or Personal Property Tax

Sales Tax

Income and Franchise Tax

Alabama

Real and Personal

Yes

Yes

Arizona

-

Yes

Yes

Arkansas

-

Yes

Limited

California

-

Limited

Yes

Colorado

-

-

Yes

Connecticut

Real and Personal

Yes

Yes

Delaware

-

-

-

Florida

Real and Personal

Yes

Limited

Georgia

Real and Personal

Yes

-

Hawaii

Real and Personal

Yes

Limited

Idaho

Real and Personal

Yes

-

Illinois

Real

Yes

Yes

Indiana

Personal

Yes

-

Iowa

Real

Yes

-

Kansas

-

-

-

Kentucky

Real and Personal

Yes

Yes

Louisiana

-

Yes

Limited

Maine

Real and Personal

Yes

-

Maryland

Real and Personal

Yes

-

Massachusetts

Real and Personal

-

Limited

Michigan

Real and Personal

Yes

-

Minnesota

Real

Limited

-

Mississippi

-

Limited

-

Missouri

-

Yes

Limited

Montana

Real and Personal

-

-

N. Carolina

Real and Personal

-

Yes

N. Dakota

Real

-

-

Nebraska

-

Yes

-

Nevada

Real and Personal

-

-

New Hampshire

Real

-

-

New Jersey

Real

-

-

New Mexico

-

Yes

-

New York

Real

-

-

Ohio

Real and Personal

Yes

Yes

Oklahoma

-

Limited

Yes

Oregon

-

-

Yes

Pennsylvania

-

Yes

Yes

Rhode Island

Real and Personal

Yes

Yes

S. Carolina

Real and Personal

Yes

-

S. Dakota

-

-

-

Tennessee

Real and Personal

Yes

Yes

Texas

Real and Personal

Yes

-

Utah

-

Yes

-

Vermont

Real and Personal

-

-

Virginia

Real and Personal

Yes

W. Virginia

Personal

Yes

Washington

-

Yes

Wisconsin

Real and Personal

Yes

-

Wyoming

Real and Personal

-

-

How Some Companies Have Fared

There are numerous examples of companies that have taken advantage of state tax incentives and exemptions for pollution control equipment. The following briefly shows how manufacturers in three different states accrued millions of dollars in tax savings.

  • U.S. automaker
  • -- The annual savings for this company on its facilities in only one state exceeded $4 million in state and local taxes. This automaker focused on one state and reviewed several plants. Through its review and analysis, executives found numerous benefits.
  • Large industrial manufacturer
  • -- The annual savings for this manufacturer from its numerous facilities exceeded $4 million in property taxes. This multi-function manufacturer placed all of its large plants in three states under review. Tax reductions were obtained through prospective savings and refunds.
  • Chemical manufacturer
  • -- This company achieved $3.5 million in savings over 10 years based on a review of four facilities in one state. This manufacturer had previously claimed approximately 17 percent of its total personal property as pollution control eligible. After reviewing its facilities, nearly 30 percent of its total personal property was verified as eligible for pollution control exemptions.

Conclusion

The need to comply with pollution control regulations is not likely to abate, despite the recent change to a new administration. Indeed, the continued high profile of environmental issues will quite likely result in companies having to actively invest in pollution control equipment on a continuous basis for years to come.

As the above success stories show, companies can realize significant savings by identifying their pollution control-related assets, applying for certification, and taking advantage of potential, unrealized tax abatements and incentives. In today's constantly changing state and local tax arena, it pays to know the state and local pollution control regulations and how to leverage them to your strategic advantage.

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.




This article originally appeared in the July 2001 issue of Environmental Protection, Vol. 12, No. 7, p. 47.

This article originally appeared in the 07/01/2001 issue of Environmental Protection.

About the Authors

Joseph Calvanico is a partner with KPMG LLP, the U.S. member of an international accounting firm of the same name. He has more than 20 years of state and local tax experience and is the National Deployment Partner for KPMG's Pollution Control tax services.

Robert Dunlap is a partner with KPMG LLP, the U.S. member firm of an international accounting firm of the same name. He is the National Leader for KPMG's Property Tax Services.

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