Ryan Randazzo

The Republic | azcentral.com

A complaint in Superior Court is challenging the state decision to tax leased solar panels.

Rooftop solar panels that are owned%2C not leased%2C don't pay the taxes.

Leased solar panels in Arizona are facing the prospect of property taxes next year.

Companies that offer solar leases are suing the Arizona Department of Revenue over its decision last year to tax leased solar panels, which could cost thousands of solar users hundreds or thousands of dollars a year and crush the local solar market.

Solar panels in Arizona that homeowners and businesses own are exempt from such taxes. The leasing companies assumed the same exemption applied to them, but after a review, the Revenue Department last year wrote an interpretation that the leased panels did not qualify for the exemption.

It suggested the leasing companies should be paying property taxes on their equipment. SolarCity Corp. and Sunrun Inc., along with other industry supporters, tried but failed to get a change through the Legislature earlier this year.

The two companies filed their complaint Monday seeking a declaratory judgment in Superior Court. They face millions of dollars in taxes, though the companies have said most of their leasing contracts will pass that liability to the homeowners, businesses, schools and nonprofits that lease the panels.

Most schools, churches and other government and nonprofit organizations that install solar use leases for the equipment.

Based on the DOR's figures, a $34,000 solar-panel array leased by a homeowner would cost about $152 in property taxes in its first year, decreasing every year as the system depreciates. Most residential customers who lease panels save $5 to $10 a month on the balance of their power bills and new lease payment, or $60 to $120 a year. A $152 tax hit would eliminate savings from solar for most.

The solar companies argue that the leased panels are "designed for the production of solar energy primarily for on-site consumption" and thus fall within the portion of the law exempting rooftop solar from tax valuations.

That's not how the Department of Revenue saw things last year. The department conducted a review of how solar equipment was taxed, and determined that leased rooftop solar panels were like small merchant power plants selling electricity to the homeowners or businesses. Solar power plants are not exempt from property taxes.

The department based its determination on the definition of equipment that generates electricity "not intended for self consumption." Like power plants, the department views the leased solar panels as renewable energy equipment, valued at 20 percent of the depreciated cost.

In its memo last year, the Revenue Department said that whether or not the solar panels generate electricity to be used on site is not the only issue. The memo argued that because the solar companies own the equipment and don't use the electricity, they should be valued just like power plants.

A few weeks ago, the Revenue Department began sending valuation notices to SolarCity, Sunrun and other companies involved in solar leases. The department is seeking to determine the value of all the property for taxes that will be due in 2015.

The leasing companies argue they are "not in the business of generating, transmitting or distributing electricity to customers ... so they are not subject to valuation or taxation," according to the complaint. The companies simply lease equipment designed to produce electricity for on-site consumption, they said.

The companies' complaint also seeks legal fees.