What's the difference between a new car and an energy-saving heat pump?
The rebate the manufacturer gives the customer on the car is not taxable, while the rebate the electric utility gives on the heat pump is considered income and subject to federal income tax.
The millions of conservation-conscious Americans who accepted offers of rebates from their utilities to install energy-saving equipment in their homes or businesses likely were unaware that the Internal Revenue Service considers such payouts taxable.
But according to the IRS, the rebates are income and soon it will be time to pay up. Potomac Electric Power Co. is about to join other utilities and electric cooperatives throughout the country in sending out Form 1099 along with the monthly bill. Form 1099 is the document on which banks, mutual funds and other organizations report taxable income to the IRS.
Between 35 and 50 percent of all electricity consumers in the United States are served by utilities that offer some form of rebate program, according to the American Council for an Energy Efficient Economy. The programs vary in detail, but in general they offer cash rebates to consumers who save electricity by replacing inefficient appliances with efficient ones, installing energy-saving heat pumps or relighting businesses with more efficient fixtures.
While many state regulators prohibit them, rebate programs have been growing in popularity where permitted. In 1991, utilities and power authorities will pay out $391 million in rebates, according to the Edison Electric Institute, the trade association of the investor-owned utilities.
Before 1989, such payments were exempt from taxation by federal law. But when the law expired, the IRS moved quickly. It issued what it calls a "private ruling," or policy-setting tax advice statement, to an unnamed rural cooperative saying such payments would be taxable.
The theory, according to IRS spokesman Frank Keith, is that such rebates are different from the popular auto incentive programs. A car purchase rebate is just a price reduction, Keith said, but an energy-saving rebate is a contractual payment by the utility for a service rendered: reduction of electricity consumption that enables the electric company to avoid building new power plants.
To the utilities and many energy conservation groups, the IRS position is logically absurd and environmentally indefensible.
"The IRS is wrong," S. David Freeman, general manager of the Lower Colorado River Authority, told a House committee last spring. "There is agreement among utility industry representatives, regulators, conservation groups and consumers that rebates . . . should be encouraged. . . . Conservation measures, regardless of customer type, benefit all customers and help reduce pollution. By reducing load, utilities can avoid building additional generating capacity and avoid emitting more pollutants into the air."
The IRS ruling "sent shock waves through our industry because of the serious impact on all sorts of programs in our industry's energy strategy," said John McCallum, assistant comptroller of Pepco and co-chairman of the Edison Electric Institute's tax analysis committee.
Rep. Barbara B. Kennelly (D-Conn.) and Sen. Steve Symms (R-Idaho) introduced parallel bills that would have restored the tax exemption, but they died in the closing days of Congress.
McCallum said that since Pepco's program began in April, the utility that serves the District and its Maryland suburbs has issued more than 1,000 rebates, totaling more than $100,000. Only a small number of customers whose rebates were more than $600 will receive 1099 forms, but all who received rebates are responsible for reporting the income, Pepco spokeswoman Nancy Moses said.
Virginia Power has no rebate program because state regulators prohibit it, a company spokesman said.
Not taxable are the special credits Pepco grants customers who join its Kilowatchers program, under which Pepco installs devices on central air conditioners or electric water heaters that enable the utility to shut down those appliances during periods of peak demand for electricity.