The Energy Tax Aspects of Drug Stores

The drug store sector has undergone tremendous growth in recent years and has seen the emergence of national sector-wide domination by three companies: Walgreens, CVS and Rite Aid. As the industry has evolved to three leading companies they have increasingly focused on energy management. With proper tax planning, considerable tax incentives are available to complement these companies’ advanced energy efficiency initiatives.

The EPAct Tax Opportunity

Pursuant to Energy Policy Act (EPAct) Section 179D, drug store owners or tenants making qualifying energy-reducing investments can obtain immediate tax deductions of up to $1.80 per square foot.
If the building project doesn't qualify for the maximum $1.80 per square foot immediate tax deduction, there are tax deductions of up to 60 cents per square foot for each of the three major building subsystems: lighting, HVAC and the building envelope. The building envelope is every item on the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.
The following chart illustrates the potential total EPAct tax deduction for the major drug store chains:

Major Drug Stores

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1. Walgreens recently purchased Duane Reade a regional chain with a major market share in New York City.
2. Duane Reade Square footage based on 7,100 square foot store size average from 2003.
3. Based on 12,500 square foot average store size from 10-K.

Drug Store Tax Planning


Building lighting comprises a large portion of drug store energy use. It is important to realize that effective January 1, 2009, most probe-start metal halide lighting may no longer be manufactured or imported into the United States; and, effective July 1, 2010 most T-12 lighting may no longer be manufactured or imported into the United States. Fortunately, the leading three drug store companies are all ahead of the pack in this regard, as they have recently upgraded to at least T-8 lighting . A lighting retrofit, like these companies have done, can easily reduce lighting electricity costs by 40 to 60 percent. The following chart shows when EPAct lighting tax savings are applicable for typical drug store spaces:

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LED Lighting Conversion

Previously most lighting upgrades were to T-5 or T-8 fluorescent bulbs; however the recent trend has been to upgrade to the new technology, LED lighting . The leading three drug stores have started to phase in LED lighting, and we anticipate that in the near future they will fully convert to LEDs. For example, CVS has started to replace all of their lighting in noncritical store areas with LEDs , and in Walgreens’ newest stores LED lighting is used in the coolers, freezers and exterior signage . We believe the next step will be upgrading to LEDs for all mainstream store lighting. This would enable the drug store owners to take immediate substantial EPAct tax deductions.


In addition to upgrading lighting, drug stores should utilize new HVAC efficiency package units and where feasible chillers. Store owners should take their most efficient store, combining the LED lighting discussed above, and the most efficient HVAC and have it modeled using IRS approved software to see if it qualifies for multiple EPAct tax deductions . With this approach, they could plan into $1.20 to $1.80 EPAct tax deductions for every store retrofitted to that energy efficiency level or better on or before December 31st, 2013.

Building Envelope

There are also drug store EPAct tax deduction opportunities for energy efficienct upgrades to the building envelope. Examples of energy efficient upgrade opportunities for the building envelope are new roofs and improved insulation. For instance, in Walgreens’ LEED certified store in Chicago, the roof was built with a white coating and plants growing on top (commonly called a “green roof”) and CVS constructs all of their new stores with white roofs made out of environmentally preferable materials . Sometimes the forgotten EPAct tax deduction opportunity, imporvements to the building envelope can contribute in large ways to receiving full $1.80 EPAct tax deductions.

LEED Certified Stores

If they have any existing LEED (Leadership in Energy and Environmental Design) stores, drug store owners already have a store that has an energy simulation model and it could quickly be evaluated to see if multiple EPAct tax deductions are in the offing. For example, Walgreens has LEED stores in Mira Mesa, CA and Chicago, and has four more LEED projects in the process . CVS has a LEED store in La Quinta, CA and Rite Aid utilizes architecture and engineering firms with LEED accredited staff . This gives these organizations an advantage. These companies should first determine whether existing LEED models can be converted to EPAct models that already qualify them for tax savings. One planning technique is to take a beta store with optimized lighting, HVAC and building envelope efficiency, and to lock it in to trigger major deductions in multiple stores.

The three main drug store companies are in continuous and growing competition with each other. It is interesting to note that the first CVS and Walgreens LEED stores are less than 200 miles from each other. In highly populated areas all 3 major drug store companies often will have stores in close proximity to one another other. Once a market is this saturated, achieving top line sales growth is challenging. Therefore, all operating cost reduction including energy cost reduction becomes crucial.

Distribution Center Tax Savings

Drug store chains can also obtain large immediate EPAct tax deductions by retrofitting their distribution centers and warehouses. As noted by CVS, these companies have already upgraded their distribution center lighting . The next step for non-conditioned distribution centers is to upgrade to new energy efficient heating systems, such as Cambridge systems, and trigger full EPAct deductions . There are multiple heater technologies suitable for the distribution center market, including direct fired gas heaters, unit heaters, and infrared (radiant) heaters. If feasible the heater should be mounted on an exterior wall to optimize the roof top solar P.V. space. As can be seen by the following chart, some of the drug store chains mentioned above have very large amounts of distribution center space that are potential candidates for EPAct deductions:

Major Drug Store Distribution Centers

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Like retail stores, distribution centers need to be modeled using IRS approved software. CVS is currently building a distribution center in Chemung County, NY that it expects to be LEED certified. This area of northern New York will require a warehouse heater, and a highly energy efficient heater should support EPAct tax deductions. The existing LEED model can be analyzed to determine the opportunity to convert to an EPAct model supporting back tax deductions.


The “Big 3” drug stores have become a very important property category that has recently experienced a large increase in store units. In fact, the drug store sector has become a leader in energy efficient technology upgrades. However, in order to be more competitive these companies need to take the further steps mentioned above to continue to lower costs and trigger larger EPAct tax deductions. Continued installation of energy efficient equipment, combined with the appropriate tax planning, will be an important element for continued success in the drug store sector.

See CVS Corporate Responsibility, <>; Rite Aid Environmental Responsibility, < http://www.riteaid .com/company/about/sustainability.jsf>, See Walgreens Social Responsibility, < http://www.walgreens .com/responsibility/planet/Green_Initiatives .html>.
See Charles Goulding, Jacob Goldman & Taylor Goulding, The Economic, Business & Tax Aspects of Light Emitting Diode Interior Building Lighting, , Corp. Bus. Tax’n Monthly, January 2009, at 21.
See CVS Corporate Responsibility.
See Walgreens Social Responsibility.
See Charles Goulding, Jacob Goldman & Kenneth Wood, Tax Deductions for HVAC Efficiency, Building Operating Management, April 2010, at 58.
See Walgreens Social Responsibility.
See CVS Corporate Responsibility.
See Walgreens Social Responsibility.
See CVS Corporate Responsibility.
See Rite Aid Environmental Responsibility.
See CVS Corporate Responsibility.
See Charles Goulding, Jacob Goldman & Raymond Kumar, Large EPAct Energy Tax Deduction Opportunities for Commercial Heaters, Corp. Bus. Tax’n Monthly, January 2010, at 11.

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