Oregon biomass tax credit: Change is upon us

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Beginning in 2007, the State of Oregon began offering an income/excise tax credit to collectors or producers of Oregon-sourced biomass used for the production of energy in Oregon. The intention was to encourage better development, distribution and use of Oregon-sourced biomass to produce electricity, improve forest health, maintain and create jobs, and reduce air pollution from wild fires and crop burning among others.

The amount of credit varies depending on the amount of and type of biomass collected or produced. For example, taxpayers can earn $10 per wet ton for wood-source biomass, $5 per wet ton for animal-produced biomass and 10 cents per gallon for used cooking oil.

In order to be eligible for the credit, you must be a producer who will use the biomass as either a biofuel or to produce biofuel in Oregon. The credit may be claimed in the year it is earned and carried forward up to four years or it may be transferred to another taxpayer for cash. It may not be used to offset the Oregon minimum tax.

In 2009, the legislature amended the statute to allow a biomass producer or collector that is also a biofuel producer to be eligible for the credit, and directed the Oregon Department of Energy to adopt rules to certify the credit and set a transfer price similar to the Business Energy Tax Credit program. The 2009 legislation also limited the time frame in which the biomass credit may be transferred to any date before the original due date of the tax return in which the credit may first be claimed.

On July 1, 2010, the DOE published the temporary administrative rules which establish the procedures, criteria and documentation necessary to enable the DOE to certify the credits; set an application fee of 7 cents multiplied by the amount of credit requested or $50, whichever is greater; and set the pass-through rate for the transfer of the credits at 90 percent. The pass-through rate, prior to state mandated 90 percent rate, was the result of negotiations between the buyer and seller of the credits and typically ranged anywhere between 75 percent and 85 percent of the face value of the credit. The Biomass Tax Credit Advisory Committee members strongly encouraged the DOE to set a lower pass-through rate consistent with the historic levels in order to maintain a market for the biomass tax credit. Many believe that the 90 percent rate will hinder the ability of taxpayers to sell their credits at times other then the end of the year as the discount is not large enough. This will cause additional problems for companies that have seasonal cash flow needs that might not coincide with the timeline in which the sale of the credit is allowed.

Furthermore, the eligibility criteria have become more stringent as certain efficiency metrics must be met for those converting biomass into energy. If biomass is converted to biogas and used for energy production, the biomass must be converted at a facility with a minimum engine-generator set electrical efficiency of 25 percent; if the biomass is converted to heat and/or electric energy through combustion, the biomass must be converted at a facility with a minimum overall thermal conversion efficiency of 40 percent. These efficiency criteria are seen by many as the DOE’s approach to limit the amount of credit certified even though such efficiency criteria do not appear in the statute nor can be found in legislative history. Initially, the DOE proposed a $5 million cap on the program; however, once the DOE was advised that it did not have statutory authority to impose such a cap, the efficiency metrics were proposed. The advisory committee members have also questioned the DOE’s authority to impose these additional efficiency criteria.

At this time, it remains to be seen whether these changes to the rate and additional efficiency criteria will survive the final rulemaking process, which must take place within 180 days of the adoption of these temporary administrative rules.

As it stands now companies claiming the credits must move forward assuming these will be the final rules and should make sure that they meet the criteria. The last thing any company wants is to make a business investment decision with having factored in these credits and then later find out they no longer qualify.

Rob O'Neill is a state and local tax partner with Moss Adams. He co-wrote this column with Irina MacEwan, state and local tax senior.