Taxes and Incentives

In response to budgetary pressures,states are trying to drive additional revenue either by using incentives to attract more data center operations or by collecting more revenue from those they have.

Hot Issues:Sales Tax Collection

  • States are becoming more aggressive in defining the conditions under which online retailers must collect sales tax on internet purchases. Texas and Amazon are currently doing battle over this issue.
  • In response,some larger online retailers are reconsidering their affiliate structures in states like Illinois in order to avoid collection requirements.

Sales Tax Expemption

  • Sales tax exemptions on computer equipment and/or construction costs can be found in many states and represent significant savings for data centers.
  • In response to interest from Verizon Wireless and others,new legislation in Wyoming exempts the sale or lease of qualifying computer equipment and other peripherals (including racking systems,cabling and trays,etc.) from excise (sales) taxes. A minimum of $2 million in qualified purchases is required.
  • The clock is ticking on the State of Washington’s 15-month sales tax exemption for the purchase and installation of computers and energy for new data centers in rural counties. Projects must begin by July 1,2011 to be eligible.

Hot Issues:Revenue Recognition

  • As cloud computing continues to grow,questions about how to tax related revenues are also growing. Should the revenue be recognized at the location of the customer or the server?  Some states are choosing the latter,meaning cloud computing data centers must consider corporate income tax rates and income tax incentives when siting new facilities.
  • Income tax credits are frequently tied to job creation;however,credits tied to investment levels are more likely to benefit a data center.

Property Tax Reductions

  • Thirteen states in the continental U.S. have a statewide personal property tax exemption for data center equipment. However,definitions of terms like “data center” and “peripheral equipment” vary,resulting in dissimilar application of the exemption from state to state.
  • Among the states without exemptions for data center equipment,property tax abatements can often be negotiated. The disadvantage of abatement versus exemption is 1) abatements must be negotiated instead of simply claimed,and 2) future equipment refreshes may not qualify for the abatement.
  • Indiana has a hybrid structure which allows counties to exempt personal property taxes on data center equipment on a company-by-company basis. Indiana communities are using the incentive to compete with Illinois which has a statewide exemption for data center equipment.

Federal Stimulus

  • The Reid-McConnell Tax Relief Act of 2010 provides for 100-percent bonus depreciation on deduction allowances for investments in new business equipment placed in service between Sept. 8,2010,and Dec. 31,2011.  Note,however,that state tax regulations vary in their allowance of the bonus depreciation.

Economic Impact

  • Incentive negotiations rely on successfully communicating the benefit of a project to the community. Data center owners can claim the following:
  1. Large additions to the tax base with few offsetting requirements for services (especially public education);
  2. High tech,well-paying jobs in a growth industry;
  3. Large,consistent demand for electricity,a boon for the utility company;and
  4. An environmentally clean operation.

Recent Deal Spotlight

Company:Microsoft -Boydton,VA
Investment:  $499 million for data center facility;$4.5 billion for total campus
Jobs:  50
Incentive:$2.1 million cash grant for site development,$4.8 million from the Virginia Tobacco Commission,County stimulus grant calculated at 90 percent  of personal property taxes for 20 years and (likely) land for the industrial park at no cost ($2 million value).

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