States Battling for Data Center Investment with Tax Cuts

Legislators in Texas and Minnesota are trying to bring a little more of the data-center boom to their respective states, using tactics more often employed to attract factories and other major employers.

In the past week, both states passed legislation that cut taxes normally applied to large IT facilities, in hopes that lower costs would make their states—both of which already stand among the leading datacenter regions in the United States—even more attractive.

The tax benefits come primarily from exemptions that allow companies building large IT facilities to avoid paying sales tax on equipment bought to be used in the facility for its core purpose. The rules don’t cover office supplies such as desks and filing cabinets—but do cover all the computing, networking, storage, heating, cooling, monitoring, security and other core systems packed into the buildings.

The tax breaks affect only the cost of equipping a datacenter—not acquiring the land, building or staffing the facility. At state sales tax rates ranging between 4 and 8.5 percent, however, even a partial sales-tax exemption could save millions for any company equipping a large datacenter.

Sales-tax exemptions contrast with policies in more than a dozen other states that tax not only new datacenter equipment, but software and services, as well.

Massachusetts, for example, is considering a proposal to add a 4.5 percent tax on custom-written or cloud-based software. The tax would serve as an extension to an existing rule that applyes sales tax to packaged software, but includes more than just custom-written code built to support individual applications. It would also apply to the work of designing a site or cloud platform, as well as writing Java, PHP or other custom code either for display or to integrate corporate applications into an existing cloud.

Other states—including Ohio, Texas, New York, South Carolina and Washington—tax computer services as well as computer equipment.

Meanwhile, Vermont and Idaho have passed rules exempting cloud providers from sales tax, though the tax breaks aren’t as comprehensive as those in Minnesota or Texas.

Under a bill signed by Gov. Mark Dayton, Minnesota offers a sales-tax exemption to companies refurbishing existing datacenters, and made it far easier for companies building new datacenters to also qualify; under the previous law, only new datacenters could apply for the exemption, which required a commitment to provide at least 30,000 square feet of space and cost at least $50 million ($25M/year) over the course of two years.

The new Minnesota law lowers the size limit to 25,000 square feet for either new or refurbished datacenters and lowers investment requirements for new facilities to $30 million over four years (7.5M/year). Datacenters undergoing refurbishment still have to commit to $50 million in costs over two years.

The Texas bill—which must still be signed into law by Gov. Rick Perry—is even more generous. The exemption requires a capital investment of only $200 million to qualify, and extends for 10 years rather than two or four. Datacenters investing $250 million or more can stretch out the exemption to 15 years.

The Texas exemptions don’t apply to service providers building multi-tenant facilities, however. To qualify, datacenter plans have to cost at least $200 million over five years and create 20 new full-time jobs at pay rates 20 percent above the average in that county. Qualifying facilities have to be at least 100,000 square feet, as well. If signed by the governor, the Texas bill will go into effect Sept. 1; the Minnesota rule applies after July 1.

Taxing—or exempting taxes from—the money companies spend on equipment for data centers may be used as an incentive, but are far more concrete and predictable than taxes on software, according to a study (PDF) from consultancy KPMG. Multi-tenant facilities, or datacenters hosting data or logic for applications housed in many locations, make taxing corporate software even trickier than taxing sales on the Internet, the report added.

Purchases made online may cross or involve networks and servers in several states or countries, but usually include a specific product owned by an entity in one location and sold to an entity in another.

Datacenter construction is similarly tied to geography and is therefore relatively easy to tax or exempt from taxes. It is the services and applications that run on top of those data centers that will become tricky tax problems for many companies, according to KPMG.


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