The 25C tax credits have been a popular sales tool in the HVAC industry since they were enacted in their current form by the American Recovery and Reinvestment Act (ARRA) of 2009. Under the ARRA revisions to the tax code, homeowners who purchase high-efficiency HVAC systems are eligible for a $1,500 tax credit. However, these residential tax credits are set to expire on Dec. 31, 2010.

According to a variety of sources, the 25C credits have had a significant impact on the industry, and have particularly aided sales of high-end, high-efficiency equipment. Some in the industry are worried that the expiration of the credits will drastically reduce HVAC sales, and there is a movement being led by Heating, Airconditioning, and Refrigeration Distributors International (HARDI) to urge Congress to extend 25C.

IMPACT ON SALES

Contractor Luke Weiden, vice president of Town & Country Services (Tonica, Ill.), said the credits have had a “tremendous” impact on business. “Not only has it helped us close deals with people that otherwise would’ve been on the fence, but also it has helped us upgrade people to higher purchases resulting in bigger tickets,” he said. According to Weiden, the 25C credits helped Town & Country increase its business by 20 percent in 2009, and this increase has continued into 2010.

Speaking from the distributor perspective, Brian Newport, residential sales manager at The Habegger Corp., said, “The tax credit has helped spark our business in a very positive manner.” He continued, “We have seen our sales climb approximately 12 percent year-to-date from 2009 to 2010.” Newport clarified that a large percentage of that increase is related to the tax-credit-qualifying products.

Contractor Larry Taylor, president of AirRite Air Conditioning Co. (Fort Worth, Texas), said that his firm had benefited from the credits, although many of his customers had been confused by how to apply the credits. He summed up the impact on his business: “Total systems installed or other work performed that resulted in customers getting a tax credit have been less than 15 percent of our system sales.”

Adding a note of caution, Nathan Wright, director of product marketing processes and support at Trane Residential Solutions, said that interpreting sales numbers as the result of the credits can be tricky. “It’s very difficult to know the volume impact and whether it has motivated homeowners to replace heating or cooling systems that they wouldn’t have otherwise,” he said.

HIGH-END PRODUCT MIX

From the manufacturers on down through the distributors and contractors, every segment of the industry has noticed the positive impact of the tax credits on sales of high-end, high-efficiency equipment.

Matt Lattanzi, director of product management for Nordyne, said, “We have seen a significant mix shift to higher efficiency systems in all residential product categories - splits, furnaces, and packaged systems.” He noted that the most popular Nordyne products that qualified for the credit have been its 95.1-percent AFUE two-stage, variable-speed furnaces and 15 SEER split heat pumps.

According to Trane’s Wright, this effect has been seen by manufacturers across the industry. “The tax credit has definitely had an impact on the energy mix for equipment. Industry numbers show a significant shift from 13 SEER air conditioners and heat pumps to tax-credit-qualifying units,” he said. “The same holds true for the mix from 80-percent efficient furnaces to 95-percent efficient furnaces.” Wright added that variable-speed indoor units have been the most popular Trane products for the credit “because the relatively high efficiency levels for air conditioning and heat pump systems require a variable-speed furnace or air handler to qualify.”

This trend to a higher-end product mix has been more visible because of the economic climate. Newport noted, “Interestingly, we would typically see a decline in some of the higher-end product sales due to a sluggish economy. However, the tax credit has made the affordability of the higher-end products more of a reality for many folks that, in years past, may not have moved up to the top products.”

Taylor agreed, noting that the credits “have driven some additional business to the table from customers wanting the higher-end products.” He said qualifying gas furnaces, a/c units, and heat pumps were the most popular products purchased with the intent to receive the credits.

Weiden said his company had also “been seeing a lot of complete system change outs with 95-percent-plus variable-speed furnaces coupled with 17-plus SEER air conditioners.” Plus, he added, “This also has allowed us to sell add-ons such as humidifiers and IAQ products.”

According to Russ Donnici of Mechanical Air Service Inc. (San Jose, Calif.), the tax credits have also had a positive effect on sales of alternative energy systems. From a tax credit perspective, he said the most popular products in order of sales were high-efficiency equipment, followed by hybrid systems, geothermal, solar thermal, and solar photovoltaic. In addition, the popularity of geothermal systems may rise in the future, since the tax credits for these specific installations will continue through 2016.

At present, however, high-efficiency furnaces and air conditioning systems have received the biggest boost from the tax credit. According to Newport, “By far, the 95-percent [AFUE] tax-credit-eligible furnaces have been the big winner.” He also noted that for Habegger, “Tax-credit-eligible air conditioners are up almost 25 percent over 2009, while the tax-credit-eligible heat pumps are up about 5 percent year-to-date versus 2009.”

THE PUSH TO EXTEND

Considering these positive reports on the sales of high-efficiency equipment, some in the industry are apprehensive about what will happen when the tax credits expire at the end of the year.

Weiden said, “It is hard to say the potential impact this will have on our business, but it will make us have to work harder to make sales that traditionally would have been slam dunks over the past two years.”

In response to these concerns, HARDI recently announced an industry-wide effort to extend the credits. According to Talbot Gee, HARDI vice president, “New units still aren’t flying off the shelf like we hoped despite the heat and the tax credits this year, but the mix of high-efficiency units being installed is keeping a lot of HVAC businesses going these days. I don’t want to think about a 2011 without the benefit of these tax credits, so we’re urging every HVAC business to do everything they can in the next three months to help us get these tax credits extended.”

As part of this movement, HARDI launched the website www.savehvacjobs.com. Industry members can use the site to send letters to their representatives in Congress urging them to extend 25C. They can also submit company logos to a growing list of 25C extension supporters.

SIGNS OF HOPE

However, if Congress does not pass an extension of the 25C tax credits, many in the industry still see signs of hope ahead, especially in the trend toward high-efficiency equipment.

Nordyne’s Lattanzi believes that high-efficiency sales will continue after the credits expire. “High-efficiency sales will still happen because, now more than ever, consumers want to save on utility bills,” he explained. “We think there will be a mix shift back towards medium-efficiency products. However, as a percentage of the industry mix, higher SEER products and condensing furnaces were gaining market share even before the tax credits were implemented. So, while there will likely be a mix shift backwards, we don’t expect to revert entirely to pre-tax-credit numbers.”

Others noted that industry incentive programs sponsored by utility companies, manufacturers, and state and local governments should help to offset the expiration of 25C. Additionally, trends toward energy conservation and environmental awareness are also cited as hopeful signs for the HVAC industry, though there may be more bumps in the road ahead without the 25C credits.

Publication date: 10/04/2010