The Arizona Department of Revenue insisted the systems are “renewable energy equipment” that is subject to annual property taxes on 20 percent of the depreciated cost. 

State law defines “renewable energy equipment” as “electric generation facilities” that produce solar electricity “not intended for self-consumption.” The court said most rooftop solar systems are not picked up by the property tax statute because they supply electricity to the occupants of the buildings or houses where the systems are mounted. It does not matter, the court said, whether a solar company owns the system and leases it to the homeowner or other building occupant. The solar rooftop companies use leases rather than power purchase agreements in Arizona. 

The court rejected an argument that the state constitution requires property taxes to be collected on the systems. The Arizona constitution has an exemptions clause that says property not specifically exempted from taxes by the legislature is subject to tax. The court said just because the legislature can tax property does not mean it has chosen to do so.

The state constitution also has a uniformity clause that bars discrimination against similarly-situated taxpayers. The court said someone who uses a rooftop system to generate electricity for his own use is not similarly situated to a utility whose business is generating electricity for sale.

Arizona allows homeowners with extra electricity to send it to the grid through net metering, meaning the electricity meters runs backwards, effectively giving the homeowner credit at the retail rate for the electricity going to the grid. The Arizona Corporation Commission, which regulates the power sector, bars rooftop systems from producing more than 125 percent of the annual electricity consumption at a location. The solar rooftop companies say they design systems to produce less than 100 percent to ensure compliance. 

The case is SolarCity Corporation v. Arizona Department of Revenue. Sunrun joined SolarCity in challenging the tax. The two solar companies sought a declaratory order from the courts that property taxes do not apply. They lost in the state tax court, but won on appeal. The appeals court released its decision in mid-May.