When Martha Mindte needed a new heat pump for her cottage late last year, she decided to take advantage of her utility company's offer to rebate hundreds of dollars to anyone buying high-efficiency electrical equipment. After all, as an owner of her family's Rockville business, Mindte Heating and Air Conditioning, she had been touting these rebates to her customers.
But Mrs. Mindte was later surprised to learn the $100-plus check she got from the Potomac Electric Power Co. won't go as far as she thought.
CShe didn't realize it, but the Internal Revenue Service will want a piece of her rebate.
"I haven't received any notice . . . I don't mention it to customers," she said. The Pepco brochures she hands out say only: "Rebates may be subject to federal and state tax."
As utilities across the country start offering big cash bonuses to customers who install energy-saving equipment, the federal government's policy of taxing conservation incentives is causing confusion and anger among consumers and energy companies alike.
Thousands of consumers simply don't know they are required to declare the rebates as income on their tax returns. But those who get rebates of more than $600, and consequently receive 1099 tax notices, are sometimes shocked.
And utility executives, who are expected to hand out a total of $400 million in rebates this year nationwide, say the tax policy makes it hard for them to fashion incentives attractive enough to lure homeowners into conserving energy.
Consumers and industry officials say the government seems to be working at cross purposes -- encouraging conservation with one hand and penalizing it with another.
At Baltimore Gas and Electric Co., which will start offering rebates to its residential customers next week, executives said they considered fashioning an incentive that saved customers from taxes. But they soon realized it would hurt their conservation efforts.
Last year, the IRS ruled that cash energy rebates are taxable income for individuals. Rebates credited to a customer's utility bill aren't taxable.
But BG&E decided not to offer the rebate as a credit.
The whole idea of BG&E's rebates is to give people the extra cash they'll need to buy an energy-saving central air conditioner, for example, instead of a less expensive but more wasteful one, said Ed Stoltz, who heads tax planning for the Baltimore-based utility. A credit on a future bill just doesn't have the same power to convince consumers to trade up, he said.
So BG&E went ahead with plans to send out checks.
Consumers agree that cash is the best incentive, but they worry about the tax implications.
"Logically, it shouldn't make any difference" if you get a $500 credit on your bill or a $500 check, said Peoples Counsel John Glynn, who represents consumers' interests in utility matters.
"Psychologically, getting cash has more impact," he said. "But taxing things like this is regressive. It hurts the lower and middle classes. And that isn't what we should be doing. What signal are we sending when we tax things that we have decided are socially desirable?"