The state tax department is set to come out with new rules that would limit the number of tax credits solar companies can claim on a solar array.

And the solar industry, worried that the changes will deeply hurt the business, is already gearing up for a fight that likely will head to the Legislature in January.

Concerns that solar companies were gaming the system by claiming more credits than the tax credit law intended prompted state lawmakers to propose legislation last year that would ensure that only a single tax credit is taken per property. But the legislation, which the solar industry vigorously fought, never passed.

And now, armed with a recent report that says Hawaii’s renewable energy tax credits cost the state $174 million in 2012, up from $35 million in 2010 — an amount that prompted the Council on Revenues to downgrade the state’s revenue forecast from 5.3 percent to 4.9 percent — the tax department is stepping in. Frederick Pablo, director of the tax department, said that new rules are expected to be released any day.

At issue is what constitutes a system. Companies have been claiming multiple credits on arrays that use multiple inverters, something they say the tax department allows based on earlier rules issued in 2010. But those rules are about to change.

“We’re trying to make it easy for all — owners, installers, the solar industry, tax preparers — so everyone understands clearly,” said Pablo.

How much this will save the state is unknown because the tax department doesn’t collect this data — it would have to review each return manually.

But the impending rule changes are creating anxiety throughout the solar industry.

“It’s the uncertainty that is the main concern,” said Leslie Cole-Brooks, executive director of the Hawaii Solar Energy Association. She said that it should be up to the Legislature to make any changes to the rules, not the tax department.

“They’re not engineers, they’re accountants,” she said of tax department employees.

The rule changes will affect the cost of solar for residents, she said. Companies generally work the tax credits into their cost quotes for solar panels.

“The homeowner takes the hit there. It means the homeowner has to pay more. It just seems misplaced,” said Cole-Brooks. “I understand that it’s kind of like blood in the water and they want to try to do something. But I don’t think this is an intelligent solution to the problem.”

Pablo said that the new rules would take effect January 1. He said if the Legislature is unhappy with them, then it could pass legislation repealing or changing them.

The solar industry is already gearing up for a fight. On Monday, Sunetric, one of Hawaii’s leading solar companies, posted a defense of the credits on its website.

“Despite clear support from taxpayers, money saved and earned by the state and its residents and businesses alike, and a healthy solar industry, there is a year-long witch-hunt in which solar tax credits are painted as ‘corporate welfare’ and blamed for reduced tax revenues,” the company wrote.

A company executive did not respond to a request for comment.

Solar companies warned last year that restricting the credits would have a devastating impact on the industry, derailing millions of dollars in deals that had factored in multiple credits and causing a significant contraction in the industry that has spurred hundreds of jobs throughout the state.

But not everyone in the industry agrees with that projection.

Joseph Saturnia, president of Island Pacific Energy, said that the new rules are expected to cause a widespread repricing of solar projects, not sink existing deals. But more to the point, he said the state credits were no longer needed for solar projects to pencil out below the current cost of electricity prices in Hawaii.

“To be quite honest, with the increase in utility costs and the dramatic lowering of costs of systems, this turns into a situation where the tax credits are too generous and need to be re-looked at,” he said.

“We’re at the cusp now that we almost don’t need any tax credit at all.”

In addition to the new rules being put out by the tax department, he said it was likely that there would be a vigorous debate within the Legislature this session about reducing or eliminating them altogether.

The state incentive allows homeowners to take a 35 percent credit for the system’s cost or a $5,000 refund, whichever is less. For commercial projects, the credit is 35 percent or $500,000, whichever is less. There is also a 30 percent federal tax credit.

But Saturnia said the solar industry has not been abusing a loophole that allowed companies to take multiple credits. He said the tax department, at the request of the solar industry, had clarified the issue of multiple credits back in 2010.

“Nearly all solar companies have followed to the letter the specific guidance of (the tax department),” he said. “To the extent that it was abused, I would just say the guidance was issued by the tax department and followed by everyone to the letter.”

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