Tax Law and Business Organization Strategy

Wind Energy Part 5 -- Ad Valorem Tax Issues

While I’ve noted for federal income tax purposes that the state law characterization of the wind deal is only indirectly affected by the legal “names” given to wind rights, when it comes to state taxation, those “names” have definite tax consequences. What difference does it make for ad valorem tax purposes whether there is actually a wind estate or only “ventian” rights?

If, under Texas law, there is an actual wind estate, like a mineral estate, that can be severed and owned separate from the fee estate, then that estate would undoubtedly constitute real estate subject to separate taxation, when and if it is severed. In addition, when that estate, even if not severed, begins to add separate value to the ownership of the real estate to which it is appurtenant, it will begin to have an effect on the value of the real estate for ad valorem tax purposes.

If, instead of a wind estate, there are “ventian” rights, does that change the result for ad valorem tax purposes? There is some authority in Texas for the proposition that riparian rights may be severed from the surface ownership to which they attach. If that were the case, then presumably, “ventian” rights would be subject to ad valorem taxation in the same fashion as they would if they are an actual wind estate. But there is also some authority that indicates while severable, riparian rights must still attach to a surface estate that also has riparian rights in the same watercourse. Under this interpretation, “ventian” rights would always simply be something to include in valuing the real estate to which the “ventian” rights attach. And, whatever it is that might be conveyed to a person when “wind rights” are conveyed, it is not an estate in real property.

What about the value of the property placed on or affixed to the surface by the wind developer/lessee? Prior to the Texas Attorney General issuing its opinion on tax abatement (discussed in Part 6), the consensus seemed to be that this property was part of the surface to which it was attached (like a building) and would be taxed to the surface owner as an increase in value to the surface estate’s owner. For this reason, wind leases call for the lessee to pay the increase in property taxes imposed on the surface owner by reason of the turbines and other property affixed to the lessor’s property. But this is simply a contract right, and does not change the legal liability of the landowner/lessor to pay the taxes attributable to the value of the turbines, etc.

However, the Attorney General appears to believe that, since the turbines and other property are not owned by the surface owner, that they should be taxed separately to its actual owner. From the standpoint of the surface owner, this is actually a beneficial interpretation. If the wind developer has to pay its own tax on the value of its property, the surface owner does not have to collect the tax from the developer. The government collects its tax directly, and the surface owner doesn’t have to rely solely on a contract provision to collect the developer’s share of the tax and then pass on that payment to the government. While the Attorney General thinks the turbines, etc., are separately taxable personal property, there is, as yet, no case law or statutes supporting or rejectding that interpretation.

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