Solar leasing firms SolarCity Corp (NASDAQ:SCTY) and Sunrun Inc sued the Arizona Department of Revenue (ADOR) on Monday over the solar panel tax assessment. The companies claimed that ADOR’s interpretation of a law calling for taxes on leased solar panels is illegal. SolarCity said that, in 2009, Arizona Governor Jan Brewer signed into law legislation stating that no taxes would be levied on leased solar panels.

SolarCity SCTY

SolarCity argues panels are used primarily for on-site consumption

The two solar leasing companies have also asked the court to declare that the ADOR can’t tax leased solar panels under an act designed for taxing utility-owned power generation facilities that use transmission and distribution systems to deliver electricity to their customers. The leased solar systems are not subject to valuation or taxation by the Arizona Department of Revenue under the law as “it is used primary for on-site consumption,” claims the lawsuit.

SolarCity is the biggest solar installer in Arizona. The San Mateo-based company employs about 580 people in the state. It installed about 43,000 kilowatts in 2013. Sunrun has 2,500 local customers and 65 local employees. Last year, the ADOR decided to tax leased solar systems, which may cost hundreds of dollars to thousands of customers, reports the Phoenix Business Journal.

SolarCity and Sunrun likely to pass the tax burden to their customers

Solar panels owned by businesses or homeowners are exempt from property taxes in Arizona. Leasing companies like SolarCity assumed that the exemption applied to them as well. But the Revenue Department conducted a review last year, and wrote an interpretation that leased panels don’t qualify for the exemption. It said that the leasing firms must pay property taxes on their equipment. After the review, ADOR determined that leased solar panels were like small merchant power plants that sell power to homeowners or businesses.

SolarCity and Sunrun said that if they are forced to pay the taxes, their leasing contracts will put that liability on businesses, homeowners, nonprofits, churches and schools that lease solar panels. The Arizona Department of Revenue spokesman Sean Laux said last month that solar leasing firms will receive a tax based on the value of their property.

SolarCity shares fell 0.18% to $70.47 at 9:46 AM EDT on Tuesday.