Part II -Lower Operating Costs Drive Interest in Northwest

As a follow up to last week’s post regarding data center activity in the Northwest,please read below for the effect of taxes on data centers in the Northwest region:

Data center demand has largely been the domain of the top tier 1 markets. Just as the data center industry has caught the eye of investors,so has new geographic opportunities. In recent years,eastern Washington has attracted several large data centers facilities in Grant (Quincy/Moses Lake) and Douglas (East Wenatchee) counties. Microsoft,Intuit,Yahoo,VMWare,T-Mobile and more recently,Dell Computers have developed data centers. The focus of these companies has been in Wenatchee,Quincy and Moses Lake. Oregon has attracted companies like Google,Amazon,Facebook,Verizon,ViaWest,Easystreet and Intel,which have developed data centers in Hillsboro,central and eastern Oregon.

In 2010,the Washington State Legislature passed a law exempting sales and use taxes on eligible server equipment and power infrastructure for data centers in rural counties. This exemption is effective until April 1,2018 for eligible projects permitted before July 1,2011.

As the exemption winds down,a measure to extend the exemptions until 2023 was introduced in the Washington’s last legislature session. The bill passed the Senate on a vote of 41-1,but was unable to reach the House floor before the legislature adjourned for the year. It remains unclear if the failure to extend the sales and use tax exemption will affect the momentum that eastern Washington has enjoyed. The exemption will likely be brought back for consideration at the next legislature session in January of 2012,but there are no guarantees.

In summary,it’s all about TCO (total cost of ownership/operations).  In Santa Clara,where power costs are about 9 cents/kWh,the breakdown is about 1/3 rent (or construction cost),1/3 power,and 1/3 sales and property tax (on IT equipment,which gets refreshed every 3+ years).  End-users have realized that by going to Oregon (which has no sales tax,and has eliminated property tax in the Enterprise Zones for up to 5 years) or rural Washington,they could fully eliminate the 1/3 tax cost (in addition to the lower power costs).

Two big differences between Washington and Oregon relates to taxes. Oregon has a state income tax;Washington does not. Washington has a retail sales tax that applies to construction and the acquisition of servers and other data center equipment;Oregon does not. The sales tax rate in Washington varies from county to county from $.075 to $.095. Both states have personal property taxes levied at the county level that vary from district to district within the respective counties. In general,personal property taxes are based upon a millage rate for each $1,000 of market value. Computer equipment is depreciated according to schedules from the Department of Revenue for each state,although rates are not significantly different from state to state. Washington has more favorable power costs by $02- $03 per kWh.

Oregon has enterprise zones in rural parts of central and eastern Oregon that offer tax incentives. These incentives include abatement of real property and personal property taxes for three to 15 years. In addition,the governor can grant waivers for income or corporate excise taxes based upon the gross payroll for a new facility. Therefore,we are likely to see most future data center activity go to Oregon,as opposed to eastern Washington. 

Stay tuned in the next few weeks for future posts regarding comparison of other states.

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