Thursday, January 28, 2021

Five key take-aways from oral arguments in HPBA vs. EPA

The judges hearing this case: Judge
Pillard, Wilkins and Henderson.

Lawyers for HPBA and the EPA faced off today in the litigation in the DC Court of Appeals between HPBA and EPA, which is now focused only on the audit provisions in the 2015 wood heater regulations. Now, it’s a waiting game.

Each side was given 10 minutes, but the judges had so manyquestions for David Chung, the lead attorney for HPBA, that it took nearly 28 minutes before the EPA attorney, Simi Bhat, began. The oral arguments and questions from the judges can be heard here.

All three judges asked tough questions and appeared well-prepared and surprisingly well-versed in the nuances of the issue. They seemed skeptical of some of HPBA arguments at first but it’s far from clear how they may rule in this case. 

Our five key takeaways are:

David Chung, lead attorney
for HPBA
1. HPBA attorney Chung was on top of his game. Chung would have been the MVP player in this competition if this were a contact sport. He held up well against a series of tough questions from the judges and showed the value of an attorney who knows the issues, the technologies and the test methods well.

2. The court could rule against HPBA on a technicality. The judges questioned whether they should dismiss the case outright because HPBA may have forgotten to specify which member manufacturers it was representing, and thus lacked “standing” to bring the case. Judge Wilkins interrupted Chung very early in his presentation on this issue and Judge Pillard brought it up again later in the proceedings.

3. If the court sides with HPBA, it may remand the issue to the EPA.
Simi Bhat, attorney for the EPA
HPBA is asking the court to vacate and completely overturn the current audit provisions. However, if the court agrees with the HPBA arguments, it may be more likely to remand (send back) the rule to EPA instead of vacating it. Then, the EPA would need to undertake a rulemaking consistent with the court's opinion. If the rule is just remanded back to the agency and not vacated, the requirements remain in place until the EPA revises them in some way. If the audit provisions are impacted by the court’s opinion, EPA may need to issue some temporary guidance or a no action letter to address compliance issues in the interim.

4. The court may not rule on the core issues. The core issue is whether the EPA’s audit provisions are “arbitrary and capricious.” In other words, did the EPA provide enough substantiation to potentially revoke a stove model’s certification if it tested above 2 grams an hour in an audit. In essence, HPBA is saying that if EPA had allowed a stove to emit up to 3 grams in an audit test, for example, the EPA’s regulation would be more reasonable. The EPA contends that a margin is already built in and manufactures have various mechanisms available to them if they exceed 2 (or 2.5) grams in an audit. However, there are a range of legal issues that the court could rule on, in favor of one side or another.

5. When will this be resolved?
It usually takes about 2-6 months from oral argument for the DC Circuit to issue an opinion. Then there could be another rulemaking, or the audit provisions may remain intact.

The Alliance for Green Heat supports an audit program that focuses on periodic audits of the highest volume wood and pellet heater models and where heaters are not decertified for testing at slightly above the relevant emission standard but only for substantial emissions above the standard.

More about this litigation:

Hearth industry lists grounds for suit against EPA (June 2015)

EPA and States vigorously defend audit provisions (Sept. 2020)


Thursday, January 7, 2021

Guidance on the wood stove tax credit for 2022 and changes for 2023

Aug. 2022 update: The Inflation Reduction Act, now signed into law, will change the tax credit for wood and pellet heaters as of Jan. 1, 2023.  The credit in 2023 will be 30% with a cap of $2,000.  The efficiency qualification remains the same at 75% or more and it will cover all associated costs of installation, stove pipe, etc. 

For more details about the 30% tax credit that becomes effective in 2023, see our 2-page overview here.

The tax guidance needed from the IRS remains the same: can a manufacturer simply, with little or no evidence, that their stove is eligible, or does it have to be third party tested and listed on the EPA database at 75% or above?  We urge all consumers to be safe and ensure they get a genuinely more efficient appliance by relying on efficiency listings in the EPA database.  This blog looks at how the tax credit has been interpreted in the past for solar panels and other technologies, as well as the intent of the lawmakers who wrote and passed the provisions.  The Alliance for Green Heat cannot give tax related advice and interested parties should always consult a tax professional.

Tax credit info for 2022

At the end of 2020, Congress passed an omnibus relief package (download  PDF version, page 2449) that included numerous provisions on renewable energy and energy efficiency.  Among those was the inclusion of biomass heaters in section 25(D) of the IRS tax code, the investment tax credit (ITC) that has applied to residential solar panels.  The technical term used in the omnibus bill is “qualified biomass fuel property expenditures” which is defined as “the burning of biomass fuel to heat a dwelling unit located in the United States and used as a residence by the taxpayer, or to heat water for use in such a dwelling unit, and which has a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).”

Congress removed biomass stoves from section 25(C), which had provided a $300 tax credit up until December 31, 2020, to prevent a “double benefit,” or double dipping under two sections of the tax code.

The credit is set at 26% of the installed cost for 2021 and 2022, then drops down to 22% in 2023. It is set to disappear altogether in 2024 unless extended, which is common.  

Congressional intent

Much of the guidance the IRS is expected to issue about wood heaters is non-controversial and will likely to be consistent with solar.  There is one distinct issue that has plagued this industry in the past: how is 75% efficient at the higher heating value defined and how much leeway do manufacturers have to stretch the meaning?  Congress stipulated that it must be HHV, but the final language did not say that the EPA list of certified heaters is the definitive way to determine efficiency, although that is almost certainly what the IRS will allow. There is no other consistent, reliable way for retailers and consumers to know which heaters are actually 75% efficient or higher. 

Over the past 7 years, there have been a number of bills and extensive correspondence about strengthening the definition of 75% efficiency and moving wood heaters from section 25(C) to 25(D).  The only method that Congress has referred to is using the efficiencies on the EPA list of certified stoves.  No other method has been suggested. For instance, the Home Energy Savings Act of 2019 introduced by Senators Hassan and Collins, said:

“This section would tighten energy efficiency standards for biomass stoves by requiring the efficiency to be determined in reference to the EPA’s “List of EPA Certified Wood Stoves,” “List of EPA Certified Hydronic Heaters,” or “List of EPA Certified Forced-Air Furnaces.” Biomass stoves, through 2020, would be required to have a thermal efficiency rating of at least 73 percent against these tighter standards. After 2020, biomass stoves would be required to have a thermal efficiency rating of at least 75 percent against these tighter standards.” 

This language was crafted in conjunction with the Biomass Thermal Energy Council, the main architect of the language and the years-long advocacy process.  A final effort led by Innovative Natural Resource Solutions culminated in the residential portions of the BTU Act being included in this ominous spending package in December, 2020. The Alliance to Save Energy. the American Council for an Energy Efficient Economy, the Alliance for Green Heat and HPBA also agreed on parallel language that would have strengthened the efficiency criteria for an enlarged credit under 25(C) by referencing the EPA's database of certified wood and pellet heaters.

Until the IRS issues guidance, AGH urges retailers and consumers to rely on the EPA's database of certified heaters to ensure that the heater you install will be eligible for this credit.  Anyone who relies on claimed efficiencies in marketing materials should do so at their own risk and be prepared to forgo the tax credit if the stove is labeled under 75% efficient on the EPA list.


Updating IRS Form 5695

In 2022, taxpayers will need to fill out IRS Form 5695 to get the new, increased tax credit for installations in 2021.  Taxpayers will not need an updated Form 5695 until winter of 2022, when they fill out their 2021 taxes.  The current version of IRS Form 5695 is accurate for taking the $300 tax credit under section 25(C) for purchases made in 2019.

When the IRS updates a form, such as Form 5695, they issue an “early release draft” in advance, along with draft instructions.  For instance, you can see a previous early release draft for Form 5695 here, issued September 25, 2020, for changes they needed to make at that point.  This draft does not include the new 26% tax credit for wood heaters, which will appear in a draft released later in 2021.


What is included in the new tax credit?

The new tax credit is for the installed cost, including purchase price, sales tax, labor costs, and items necessary for installation, such as venting and floor protection.  The IRS is expected to provide more detail on items associated with installing wood heaters. In the meantime, consumers should retain receipts for all those expenditures.

Some stove  manufacturers issued
certificates for stoves under 65%
to claim eligibility for the $300
tax credit.
AGH expects the IRS to update their current guidance later in 2021 to accommodate issues specific to high efficiency wood and pellet heaters. They may address, for instance, the cost of sweeping a chimney prior to installing a new heater eligible for the 26% tax credit, or the cost of upgrading floor and wall protection.  It is unclear if the IRS could bar manufacturers who issued an erroneous certificate claiming a stove was eligible for the $300 credit under 25(C) from issuing certificates for their stoves that would be eligible for the larger credit under 25(D).

Some issues are more complicated, such as how to calculate the tax credit when you also received a state rebate or tax incentive, or a rebate or discount from a wood stove change out program.  The tax credit should help change out programs offer even greater savings to consumers, and program managers will have to prepare to give advice on it.

This DOE publication on calculating the tax credit for solar panels is very instructive on the range of issues that will apply to installing high efficiency wood heaters.  For issues pertaining to stove manufacturers issuing certificates of eligibility, this blog provides more detail.

Much of the existing IRS guidance for solar panels, reproduced below, will likely to apply to wood heaters.  Text in italics are quotes from IRS guidance on the 25(d) tax credit.  

2019 IRS Q&A on Tax Credits for Section 25D 

Manufacturers Certification. “A taxpayer may rely on a manufacturer’s certification that property is eligible for the credit so long as the Service has not withdrawn the manufacturer’s right to make the certification. The notices further clarify that the Service may determine that a manufacturer’s certification is erroneous; in such cases, the Service will withdraw a manufacturer’s right to provide a certification on which future purchasers of the component or property may rely, and taxpayers purchasing the component or property after the date on which the Service publishes an announcement of the withdrawal may not rely on the manufacturer’s certification.”

Can a taxpayer claim the credits for expenditures incurred for a newly constructed home? 

“A taxpayer can claim the § 25D credit for qualifying expenditures incurred for either an existing home or a newly constructed home.” 

May a taxpayer claim the credits in the year of purchase if installation of the qualifying property occurs in a later year? 

“No. A taxpayer may not claim the credits until the year the property is installed.”

Are the credits available for improvements made to a second home (for example, a vacation home or an investment property)? 

“A taxpayer may claim a § 25D credit for other qualifying properties described in § 25D for solar electric property, solar water heating property, small wind energy property, and geothermal heat pump property installed in or on a dwelling unit used as a second home or a vacation home by the taxpayer. But a taxpayer may not claim the § 25D credit for expenditures for improvements made to an investment property, such as rental property, that is not also used as a residence by the taxpayer.” AGH expects guidance on wood heaters to be the same as these other technologies. 

May a taxpayer claim a credit if the qualified property is also used for business purposes, such as in a dwelling unit in which the taxpayer also conducts a business? 

“For 25D, if a taxpayer uses property solely for business purposes, the property will not qualify for the credit. For a taxpayer who otherwise qualifies for the credits, but whose use of the qualified property for business purposes exceeds 20 percent, §§ 25C(e)(1) and 25D(e)(7) provide that the taxpayer, when calculating the amount of credit, may take into account only that portion of the expenditures for the property that are properly allocable to use for nonbusiness purposes. A taxpayer who qualifies for the credits and whose use of the qualified property for business purposes is not more than 20 percent may claim the full credit.” 

May a taxpayer include labor costs when calculating the credits? 

“When calculating the § 25D credit, a taxpayer may include the expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home.” 

May a taxpayer include sales tax when calculating the amount of expenditures eligible for the credits? 

“Generally, yes. Because the sales tax on a qualifying property is part of the amount paid or incurred, a taxpayer may include the amount of sales tax when calculating both the § 25D credit.” 

If a government or a public utility provides a subsidy (for example, an incentive, grant, or rebate) to a taxpayer to purchase or install a qualifying property under § 25C or § 25D, is the taxpayer required to reduce the cost basis of the property by the amount of the subsidy received, thereby reducing the amount of the qualified expenditure for which a credit may be claimed? 

“Rebates generally represent a reduction in the purchase price or cost of property, and the taxpayer must exclude the amount of the rebate from the amount of the qualified expenditure on which the taxpayer calculates the tax credit. In general, in order for a receipt of funds to be considered a nontaxable rebate, the rebate must be based on or related to the cost of the property; the rebate must be received from someone having a reasonable nexus to the sale of the property, for example, the manufacturer, distributor, or seller/installer; and the rebate must not represent payment or compensation for services. 

Generally, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy-efficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute rebates or purchase-price adjustments for federal income tax purposes.” 

“The taxpayer does not reduce the amount of the qualified expenditure by the amount of the state tax credit claimed in calculating the credits.” 

If a taxpayer finances the purchase of a qualifying property under § 25C or § 25D through the seller of the property, may the taxpayer calculate the amount of the credit based on the full cost of the property if the taxpayer is contractually obligated to pay that entire amount? 

“Yes. If the taxpayer is contractually obligated to pay the full cost of the qualifying property, the taxpayer may claim a tax credit based on that amount.” 

May a taxpayer claim a credit for payments of interest owed through financing or for expenses such as an origination fee or an extended warranty? 

“No. Interest expense is not part of the expenditure for qualifying property under § 25C or § 25D. Other miscellaneous costs such as an origination fee or an amount paid for an extended warranty are also ineligible for the credits.” 

May a taxpayer claim a credit for property that the taxpayer leases rather than purchases? 

“No. A taxpayer must purchase the qualifying property to claim the credits under §§ 25C and 25D.” 

May a taxpayer claim the credits when the taxpayer does not have a manufacturer’s certification that the property is eligible for the credit? 

“Yes. A taxpayer may qualify for the credits under §§ 25C and 25D without a manufacturer's certification statement if the taxpayer can show that the property meets the required efficiency standards. A taxpayer should retain documentation sufficient to establish the entitlement to, and amount of, any credit.” 

Is an expenditure for a solar air heater eligible for the § 25D credit? 

No. Section 25D(d)(2) defines a qualified solar electric property expenditure, in part, as an expenditure for property that uses solar energy to generate electricity for use in a dwelling unit. Section 25D(d)(1) defines a qualified solar water heating property expenditure, in part, as an expenditure for property to heat water for use in a dwelling unit if at least half of the energy used by such property for such purpose is derived from the sun. A solar air heater that warms air and does not generate electricity or heat water is not eligible for the § 25D credit. 

Is a manufacturer of geothermal heat pump property that provides a certification pursuant to Notice 2009-41 required to become an Energy Star partner? 

No. A manufacturer of geothermal heat pump property is not required to become an Energy Star partner to provide a certification pursuant to Notice 2009-41. However, the geothermal heat pump property must meet the requirements of the Energy Star program in effect at the time the taxpayer purchases the property. Furthermore, any manufacturer that provides a certification must retain in its records documentation establishing that the property meets those requirements and, upon request, make such documentation available for inspection by the Service. 


Wednesday, January 6, 2021

How to listen to oral arguments in HPBA v. EPA on Jan. 28

On January 28, 2021, the DC Circuit Court will hear oral arguments for
Judge Pillard
Hearth, Patio & Barbecue Assoc. v. E
, No. 15-1056.  The lawsuit, filed by HPBA in June 2015, was initially a broader challenge to key parts of the regulations governing new emission standards for wood and pellet heaters. HPBA has dropped almost all elements of the lawsuit except the audit provisions, which continue to be hotly contested. Those provisions will be the focus of the oral arguments on January 28.

Every case in the DC Court of Appeals is assigned to three judges who can sway the outcome of the case. More interesting and telling than the oral arguments of the litigants will likely be the questions of the judges, which may indicate which way they lean. This case was assigned to Judge Karen Henderson, appointed by George H.W. Bush in 1990, and Judges Nina Pillard and Robert Wilkins who were appointed by Barack Obama in 2013 and 2014, respectively. Judges Pillard and Wilkins may be more likely to side with EPA while Judge Henderson may lean more conservative.
Judge Wilkins

The intervenors in the case, represented by Tim Ballo of Earthjustice, as of now are requesting time for an oral argument on the 28th.

The case is listed as the first one of the day, at 9:30 AM, on the official schedule but is listed as third on the court's oral argument schedule. We will update this blog as we learn more about timing and who is arguing for each side. 
Judge Henderson
Members of the public can listen to the oral arguments but there is no video to watch. The amount of time per side has not yet been posted, but each side will likely have 10-15 minutes to argue. If you miss the live arguments, archived recordings can be accessed here. Recordings are uploaded regularly, perhaps as frequently as by 2:00 pm the same day as the oral argument.