Otis Singleton
Alabama's electricity rates are relatively low compared to other states, ranking 25th out of 50. The state offers some tax exemptions and incentives for businesses and residents, including on utility taxes. The utility service use tax is levied on the consumption of electricity, water, and natural gas, with returns and remittances filed and paid monthly. Alabama also offers exemptions for manufacturers and industrial processors with facilities in the state, as well as rebates and incentives for solar power systems. However, Alabama does not offer property tax exemptions for installed solar systems or net metering laws.
| Characteristics | Values |
|---|---|
| Type of tax | Utility Service Use Tax |
| What is taxed | Electricity, domestic water, natural gas, telegraph, and telephone services |
| Who pays the tax | Consumers |
| Who collects the tax | Alabama Department of Revenue |
| Legal basis | Sections 40-21-100 through 40-21-107, Code of Alabama 1975 |
| How is the tax calculated | By applying rates against the sales price of the services |
| How often is the tax computed | Monthly |
| Exemptions | Yes, for manufacturers and industrial processors with facilities located in Alabama for the purchase of electricity, natural gas, and water used in qualifying production activities |
| Other taxes and fees | Hospital Assessment Fee, Nursing Facilities Privilege Assessment, Drycleaning Trust Fund Fee, Solar Tax |
| Energy tax credits and rebates | Yes, for solar energy, wind turbines, geothermal energy, and energy efficiency |
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What You'll Learn
Alabama's utility service use tax
While Alabama offers some energy tax credits and incentives for renewable energy sources such as solar power, wind turbines, and geothermal energy, it also has a complex web of taxes and fees related to energy production and consumption. For instance, Alabama Power, the state's primary power company, has been criticised for imposing a solar tax on homes and small businesses, as well as a new tax on large-scale energy projects not owned by Alabama Power, which may hinder competition and economic development.
Additionally, Alabama offers a utility tax exemption for certain manufacturers and industrial processors. This exemption applies to the purchase of electricity, natural gas, and water used in specific production activities, as outlined in Alabama Code § 40-21-83 and 40-21-103. However, utility studies are typically not permitted in Alabama, and separate metering of utility consumption is required for exemption qualification.
The state also imposes various other taxes and assessments, such as the Hospital Assessment Fee on privately operated hospitals funded through the Alabama Medicaid program, the Alabama nursing facilities privilege assessment, and the Drycleaning Trust Fund Fee, which is a self-insurance program to address dry cleaning contamination. These taxes and fees contribute to the overall cost of utilities and energy in Alabama.
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Sales tax exemptions
Alabama's sales and use tax laws include several provisions, such as rate differentials, abatements, exemptions for specific items, and certain exemptions and credits for qualifying industries.
Alabama does not offer sales tax exemptions for solar panel systems. This means that homeowners and businesses must pay state sales tax on their solar panel systems. However, Alabama does provide energy tax credits for solar energy, wind turbines, geothermal energy, and energy efficiency. The state also offers solar rebates through the Tennessee Valley Authority, providing a $1000 rebate upon installation to offset initial costs.
Alabama offers a utility tax exemption for manufacturers and industrial processors with facilities located in the state. This exemption applies to the purchase of electricity, natural gas, and water used in qualifying production activities. Specifically, this includes electricity used in electrolytic or electrothermal manufacturing or compounding processes, natural gas used as a chemical raw material in manufacturing or compounding processes (but not as fuel or energy), and water when 50% or more is used in industrial processing.
Other sales tax exemptions in Alabama include:
- Pollution Control Equipment: Equipment or materials purchased primarily for the control, reduction, or elimination of air or water pollution are exempt from sales and use tax.
- Raw Materials: Tangible personal property used by manufacturers or compounders as an ingredient or component of their manufactured or compounded product.
- Herbicides: The gross proceeds from the sale of herbicides for agricultural use are exempt from sales tax.
- Cystic Fibrosis Research Foundation and Jefferson Tuberculosis Sanatorium: These organizations are exempt from the computation of tax on the gross proceeds of all sales.
- Fuel for Commercial Fishing Vessels: The gross proceeds from the sale of fuel for use or consumption aboard commercial fishing vessels are exempt from sales tax.
- Quality Control Testing and Charitable Donations: The use or consumption of a manufactured product for quality control testing or donation to certain charitable entities is exempt from state sales tax.
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Energy tax credits
Alabama levies an excise tax on the consumption of electricity, known as the Utility Service Use Tax. However, the state also offers various energy tax credits, rebates, and grants to promote the adoption of renewable energy sources and energy efficiency.
Solar Energy Tax Credits
Alabama does not offer property tax exemptions or sales tax exemptions for installed solar systems. However, it does provide Solar Power Performance Payments, also known as production incentives, through the Tennessee Valley Authority (TVA). The TVA's Green Power Providers Program offers small cash payments based on the number of kilowatt-hours (kWh) or BTUs generated by a renewable energy system. These payments are credited as Solar Renewable Energy Credits (SRECs). Additionally, Alabama offers a $1000 rebate upon installation through the TVA to offset initial costs, which can be received as a lump sum or deducted from the final installed price. Installers often handle the necessary paperwork for this rebate. Alabama also has favourable laws for solar power, including a lack of statewide interconnection standards, which makes the process of bringing a solar energy system online less complex and expensive.
Federal Tax Credits
The Federal Government offers a 30% tax credit for the whole installed cost of a solar system, applicable across the United States. This credit is taken directly off the tax payment, providing a significant benefit to those adopting solar power.
Other Energy Efficiency Tax Credits
Alabama homeowners can benefit from various tax credits under the Inflation Reduction Act (IRA), which includes programs to accelerate the transition to clean energy. These tax credits apply to home efficiency upgrades, clean energy installations, and new energy-efficient home construction. The exact value of these credits depends on the taxpayer's federal income tax liability for the given year. For example, tax credits are available for building envelope components that meet Energy Efficiency Requirements, such as exterior doors (up to $250 per door), exterior windows and skylights (up to $600), insulation and air sealing materials or systems (up to $1200), and electric panel and wiring upgrades (up to $600). Homeowners can claim these credits by filing Form 5695, Residential Energy Credits, with their tax return. Additionally, a home energy audit on the primary residence may qualify for up to a $150 tax credit.
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Solar tax controversy
Alabama's electric rates rank 25th out of the 50 states. The state's low electric rates make investing in solar power less attractive. Alabama does not offer net metering laws, which would allow customers to offset the cost of power drawn from the utility by transferring surplus power to the grid. Net metering is one of the main ways that solar homeowners save money on their monthly bills.
Alabama does not offer property tax exemptions for installed solar systems. A property tax exemption makes it more economically feasible for a taxpayer to install a solar system. Alabama also does not offer sales tax exemptions, which would mean that homeowners and businesses would not have to pay any state sales tax on their solar panel systems.
Despite this, Alabama does provide energy tax credits for solar energy, wind turbines, geothermal energy, and energy efficiency. Alabama also offers state solar rebates through the Tennessee Valley Authority, providing a $1000 rebate upon installation to offset initial costs. Additionally, Alabama allows local municipalities to exempt the value that solar panels add to a home from being assessed.
However, Alabama Power has introduced a new solar tax, which has been criticised for potentially blocking almost any potential competitors from providing lower-cost energy. Effective April 1, 2024, Alabama Power reduced the rates it pays to independent power producers and introduced a $0.00193 per kilowatt-hour (kWh) fee on large-scale energy projects not owned by Alabama Power. This new tax has been criticised as a threat to economic development and job growth. The Alabama Public Service Commission (PSC) has also been criticised for approving the new tax without any public hearing or comment period.
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Alabama Power's monopoly
Alabama Power is a for-profit business that operates as a government-backed monopoly. The Alabama State Legislature has granted Alabama Power a monopoly, making it the only company allowed to provide electricity to a large part of the state. This means that Alabama Power has a guaranteed customer base and a predictable revenue stream.
Alabama Power's profits are not based on electricity sales, but on the value of the infrastructure it builds or buys to meet customer demand. This is known as a return on equity (ROE). The Alabama Public Service Commission (PSC) allows Alabama Power to charge its customers for capital investments and guarantee a high profit margin. Alabama Power's ROE is based on the percentage of profit that its shareholders expect to make on their investments.
The Alabama PSC has been called upon to regulate Alabama Power's profits and protect the interests of consumers. Critics argue that Alabama Power does not sufficiently consider energy efficiency programs that could help residents lower their consumption and reduce costs. As a result, Alabama has the fourth-highest residential energy consumption and the second-highest energy bills in the nation.
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Frequently asked questions
The utility service use tax is levied on the storage, use, or other consumption of electricity, domestic water, natural gas, telegraph, and telephone services in the State of Alabama. The tax is computed monthly and is determined by applying rates against the sales price of such services.
Yes, manufacturers and industrial processors with facilities located in Alabama may be eligible for a utility tax exemption on the purchase of electricity, natural gas, and water used in qualifying production activities.
Alabama offers energy tax credits and rebates for solar energy, wind turbines, geothermal energy, and energy efficiency. Alabama Power also introduced a solar tax in 2024, with a $0.00193 per kilowatt-hour (kWh) fee on large-scale energy projects not owned by Alabama Power. Additionally, Alabama has a Drycleaning Trust Fund Fee related to the costs of investigating and remediating dry cleaning contamination, which is administered by the Alabama Department of Environmental Management.
