Taxing the Sun? Pennsylvania’s Solar Sales Tax Rules Explained
Written by Katelin Carter
Pennsylvania generally imposes a 6% sales and use tax on purchases of tangible personal property. However, the Commonwealth provides a statutory exemption for machinery, equipment, parts, and supplies used directly in manufacturing or processing operations. Pennsylvania’s Department of Revenue has interpreted this exemption to include the generation of electricity for sale, but not the generation of electricity for self-consumption.
Accordingly, purchases of solar equipment used in commercial or utility-scale projects that generate electricity for sale likely qualify for the manufacturing exemption and are not subject to sales or use tax. Conversely, purchases for residential or behind-the-meter systems that primarily serve the property owner’s own use remain taxable.
Pennsylvania imposes a 6% sales and use tax on tangible personal property unless a statutory exemption applies. 72 P.S. § 7202. Normally, when consumers buy goods, the vendor collects sales tax at purchase; however, in construction projects, when a contractor buys materials like steel, concrete, wiring, or solar panels, the contractor pays sales tax to the supplier at that point. When the contractor later uses those materials to perform an installation for a customer, the contractor does not charge the customer sales tax again on those same materials, because tax was already paid when they were purchased. The customer therefore indirectly bears that cost, since the contractor includes it in the contract price, but the state only collects the tax once.
But if the buyer is an exempt entity or engaged in a tax-exempt use, like “manufacturing,” those purchases can be exempt from sales tax if they’re used directly in the manufacturing process. 61 Pa. Code § 32.32. In that case, the purchaser provides the vendor with a properly completed Pennsylvania Exemption Certificate (Form REV-1220), allowing the materials to be purchased tax-free at the point of sale. When the exemption is valid and the equipment is in fact used directly in manufacturing, no sales or use tax is ever collected. The Department of Revenue may, however, assess use tax later if the property is ultimately used for a non-exempt purpose.
The taxability of solar-energy equipment is a relatively novel issue because Pennsylvania’s manufacturing exemption was designed for traditional industrial production, and the state only recently began to treat the generation of electricity from renewable sources as a potential form of manufacturing. Whether a solar project qualifies depends on the particular facts of the operation, such as whether the electricity is produced for sale, the scale of the operation, and how the activity is accounted for, which the Department of Revenue addressed for the first time in Revenue Ruling SUT-10-001 (2010) and Bulletin 2010-01.
The Manufacturing Exemption under Pennsylvania Law
Under 61 Pa. Code § 32.32(a), a person engaged in manufacturing or processing is exempt from Pennsylvania sales and use tax on the purchase or use of tangible personal property or taxable services that are predominantly used directly in manufacturing or processing operations. In simpler terms, this exemption covers machinery, equipment, parts, foundations, and supplies that play an active role in producing a finished product, but not materials used for construction, maintenance, or general business purposes.
Whether an item is “used directly” depends on three factors. § 32.32(a)(1)(i-iii):
- Physical proximity or how closely the property is located to the production process;
- Timing of use or whether it is used during the actual production process rather than before or after it; and
- An active causal relationship, or whether the item’s use actively causes or contributes to the production of the product. Property that is essential to the business, or required by law (like safety equipment), does not automatically qualify unless it has an active causal link to production.
This manufacturer’s exemption applies to property used more than 50% of the time in direct manufacturing activities. § 32.32(a)(2)). Items used for both production and non-production purposes are taxable unless the majority of their use is in manufacturing. The regulation provides several examples of what qualifies, like production machinery, in-process handling equipment, testing and inspection devices, packaging machinery, pollution-control equipment, and certain research tools. It also lists what does not qualify, including administrative supplies, maintenance tools, employee comfort items, building HVAC systems, and property used before or after the actual production stage (§ 32.32(a)(3)).
In short, the exemption is meant to apply narrowly to the machinery and equipment that physically and directly produce the product for sale. While § 32.32 does not specifically reference electricity, Pennsylvania law treats electricity for non-residential use as tangible personal property for sales-tax purposes. 72 P.S. § 7201(m). This means that equipment used to generate electricity for sale, such as solar panels, inverters, and transformers, can fall within the manufacturing exemption if it meets the “direct use” criteria.
Pennsylvania Department of Revenue Guidance on Electricity Generation
Earlier Pennsylvania cases concluded that the production of electricity did not constitute manufacturing because electricity was not regarded as tangible personal property. In Potomac Edison Co. v. Commonwealth, 50 Pa. Commw. 1 (1980), the Commonwealth Court held that an electric utility was not a manufacturer under the Tax Reform Code, reasoning that the generation of electricity did not involve a “substantial and well-signaled transformation” of tangible matter into a new product. Likewise, in Bell Atlantic Mobile Systems, Inc. v. Commonwealth, 799 A.2d 902 (Pa. Commw. Ct. 2002), the court reaffirmed that the manufacturing exemption applied only to physical materials, not to electrical impulses or energy transmission. These decisions reflected the statutory definitions then in effect, which did not expressly categorize electricity as tangible personal property.
The legal landscape subsequently shifted with amendments to the Tax Reform Code. The current definition of tangible personal property now expressly includes “electricity for nonresidential use.” 72 P.S. § 7201(m)(1). This statutory change undermines the premise on which Potomac Edison and its progeny rested. While those cases have not been explicitly overruled, they predate the legislature’s reclassification of electricity and thus are of limited persuasive value when analyzing modern solar facilities.
In Revenue Ruling SUT-10-001 (2010), the PA Department of Revenue evaluated a taxpayer operating a commercial solar-energy facility that generated electricity for sale to a public utility under a long-term power-purchase agreement. The Department concluded that the taxpayer was engaged in manufacturing tangible personal property because the process converted sunlight into a new, tangible product (electricity) for resale. The ruling identified specific qualifying and non-qualifying equipment under 61 Pa. Code § 32.32, applying the regulation’s “direct use” and “predominant use” tests. Qualifying equipment included solar panels (photovoltaic modules), inverters, transformers, and control systems that directly caused or contributed to the conversion of sunlight into marketable electrical energy. Non-qualifying property included support structures, racking, monitoring devices, site fencing, foundations, and administrative or maintenance tools, all of which were deemed incidental to the business or used in nonproduction activities. The ruling also required that the property be used predominantly (more than 50%) in direct production, consistent with § 32.32(a)(2), and that the facility’s output be sold into the commercial power market rather than used for on-site consumption.
Shortly after the 2010 ruling, the Department issued Sales and Use Tax Bulletin 2010-01, which confirms that the manufacturing exemption applies only to nonresidential, commercial-scale generation and specifically excludes residential, small-scale, or net-metered systems that primarily serve on-site consumption. It also emphasizes that the exemption is available only to entities engaged in manufacturing “for sale,” not to homeowners or businesses offsetting their own utility costs. The Bulletin further instructs taxpayers claiming the exemption to maintain documentation showing that the facility’s output is sold to third parties or into the electrical grid; that the equipment is used predominantly in the production process; and that nonqualifying property (e.g., building wiring, monitoring software, installation labor) is separately accounted for and taxed.
These rulings establish that electricity generation qualifies as manufacturing when conducted on a commercial scale for sale to others, and only the machinery directly causing the transformation of sunlight into electricity qualifies for exemption. Residential or on-site generation systems remain taxable because their purpose is consumption, not the production of tangible personal property for sale.
Key Takeaway
Under current Pennsylvania law, the manufacturing exemption applies to solar facilities that generate electricity for sale, but not to systems producing electricity for self-consumption. The Department of Revenue now treats electricity for nonresidential use as tangible personal property under 72 P.S. § 7201(m)(1), and has confirmed through rulings and bulletins that commercial or utility-scale solar projects qualify as manufacturing under 61 Pa. Code § 32.32. Accordingly, purchases of equipment used predominantly and directly in generating electricity for sale are exempt from sales and use tax.