Title: An act relating to providing tax incentives to promote the production and distribution of electricity from alternative sources of energy.

Brief Description: Providing tax incentives to promote the production and distribution of electricity from alternative sources of energy.

Sponsors: Representatives Anderson, Nixon, Crouse, Pflug, Priest, Tom, Ericksen, Jarrett and Benson.

Brief Summary of Substitute Bill

• Expands the types of renewable resources used for generating electricity that qualify for the sales and use tax exemption on machinery and equipment and removes the minimum 200 watt threshold.

• Provides a deduction under the public utility tax for the costs of production from an electrical generation facility powered by renewable resources.

• Terminates the tax exemptions and deductions in 2018.

Majority Report: The substitute bill be substituted therefor and the substitute bill do pass. Signed by 16 members: Representatives Morris, Chair; Ruderman, Vice Chair; Sullivan, Vice Chair; Crouse, Ranking Minority Member; Nixon, Assistant Ranking Minority Member; Anderson, Blake, Bush, Delvin, Hudgins, Kirby, McMahan, Romero, Tom, Wallace and Wood.

In 1996 the Legislature provided an exemption from retail sales and use taxes for machinery and equipment used directly in generating electricity using wind or solar energy. The exemption has been expanded to include machinery and equipment used in generating electricity from landfill gas and fuel cells. The exemption also includes the installation of the equipment including labor and services. The exemption applies to facilities capable of generating 200 watts or more of electricity. The exemption expires June 30, 2009.

The phrase "used directly" means that the machinery and equipment exempt from the tax must be part of the process of capturing energy from fuel cells, wind, sun, or landfill gas, converting that energy to electricity, and transforming or transmitting the electricity for entry into electric transmission and distribution systems or for use on-site.

Electric generation and distribution has developed in this country in the form of large centralized power plants that send electricity over high-voltage power lines to customers living long distances from the power plant. Distributive generation is the integrated or stand-alone use of small-scale power plants that may serve load on site or may be connected to a larger electrical grid. Changes in technology in recent years is making distributive generation an economically feasible alternative.

There is a growing interest in the use of renewable resources to generate electricity. Renewable resources may include water, wind, solar energy, geothermal energy, landfill gas, or biomass energy based on solid organic fuels from wood, forest or field residues, or dedicated energy crops.

The state retail sales tax rate is 6.5 percent and is imposed on the retail sale of most items of tangible personal property and some services. In addition, local sales taxes apply. Cities and counties may levy a local tax at a rate up to a maximum of 3.1 percent; currently, local rates levied range from 0.5 percent to 2.4 percent. The combined tax rate is between a minimum of 7 percent and a maximum of 8.9 percent depending on the location of the purchase. Sales tax is paid by the purchaser and collected by the seller. Sales tax revenue is deposited in the State General Fund.

The use tax is imposed on the use of an item in this state when the acquisition of the item has not been subject to sales tax. The use tax applies to items purchased from sellers who do not collect sales tax, items acquired from out-of-state, and items produced by the person using the item. Use tax is equal to the sales tax rate multiplied by the value of the property used. Use tax is paid directly to the Department of Revenue. Use tax revenue is deposited in the State General Fund.

Public and privately-owned utilities are subject to the state public utility tax (PUT). The PUT is applied to the gross receipts of the business. For electrical utilities, the applicable tax rate is 3.873 percent. Revenues are deposited to the state general fund.

The PUT does not permit deductions for the costs of doing business, such as payments for raw materials and wages of employees. However, there are several deductions and credits for specific types of business activities. These activities include production of energy through cogeneration or by using renewable energy resources; sales of electricity to direct service industrial businesses; and discounts to low-income customers.

The sales and use tax exemption for machinery and equipment used directly in generating electricity from certain renewable resources and fuel cells is modified to include additional renewable resources. A deduction is provided under the public utility tax for generating electricity from wind energy, solar energy, or fuel cells.

The sales and use tax exemption may be used for purchases of machinery and equipment used in generating electricity using certain renewable resources. The renewable resources that may be used as fuel for generating electricity include hydropower, wind, solar energy, geothermal energy, landfill gas, or biomass energy based on animal waste and solid organic fuels from wood, forest or field residues, or dedicated energy crops. The 200 watt capacity threshold requirement for eligibility is eliminated.

A new deduction is provided under the public utility tax to light and power businesses that generate electricity from certain renewable resources. The deduction is equal to the cost of production from an electric generating facility using renewable resources or fuel cells. The deduction expires in 2018.

The substitute bill: (1) Expands the types of renewable resources used for generating electricity that qualify for the sales and use tax exemption on machinery and equipment and removes the minimum 200 watt threshold; (2) adds hydroelectric energy, geothermal, and biomass energy based on animal waste or solid organic fuels from wood, forest, or field residues, or dedicated energy crops to those renewable resources eligible for the tax exemption; and (3) changes the basis of the PUT tax deduction.

Effective Date of Substitute Bill: The bill takes effect 90 days after adjournment of session in which bill is passed.

Testimony For: We need to get more green power onto the grid and the best way to stimulate investment is through broad incentives. That will create more explosive growth. However, incentives should be paired with standards.

(With concerns) There is concern over lack of definitions for some terms used in the bill.

Testified: (In support) Representative Anderson, prime sponsor; Jim Rowland, Energy Northwest; Steve Lindstrom, Northwest Energy Coalition; Kevin Hughes; Toni Potter, League of Women Voters; and Terry Oxley, Puget Sound Energy.