Primer: The Impact of Taxes & Incentives on Data Center Locations
Many states and communities are using incentives to lure data centers and establish clusters of these facilities, which, in turn, stand to benefit from tax breaks and cash grants for necessary infrastructure improvements.
Chris Schastok, Vice President, Economic Incentives Group (EIG), CBRE, Inc. (Q1 2014)

{{RELATEDLINKS}}Data center site selection has grown in sophistication over the years as companies are in constant search of reliable, dependable, and cost-effective solutions. Whether an enterprise user or a tenant in a colocation facility, most companies choose communities based on four primary drivers:

Power - cost per kWh, carbon footprint, fuel mix, and infrastructure

Telecom - fiber providers, latency

Geography - proximity to headquarters or airport locations, population size, labor force, water

Climate - Environmental risk (i.e., hurricanes, tornadoes, earthquakes, etc.), free cooling

After solving for these primary drivers, communities will remain on the short list based on real estate availability and cost. This holds true for existing colocation facilities or greenfield sites for new construction. When the box is checked for real estate, taxes and incentives end up swaying the business case or leveling the playing field for communities on a data center’s short list. Taxes and incentives are the only tools a state or community has control over in order to win data center facilities. With this in mind, 17 states have customized incentive programs for the data center industry. Typically, the larger the project investment, the more important role incentives tend to play in the overall site evaluation.

A Quick Primer on Data Center Taxes
When developing a Total Cost of Occupancy (TCO) model, one-time and recurring taxes will have a significant impact on long-term costs for a data center. The capital-intensive nature of a data center will trigger relatively high sales taxes and property taxes. Property taxes are typically payable for both real estate and personal property (or equipment).

Sales (or use) taxes are incurred on a one-time basis for purchases of building materials, mechanical and electrical equipment, IT equipment, and, in some cases, software. Sales taxes on building materials are due based on the location of purchase, whereas sales taxes on equipment are due based on the location of delivery. For example, $10 million of IT equipment delivered to a data center in Columbus, Ohio, would incur about $700,000 in sales taxes.

Expand Data center personal property taxes are payable on IT equipment, furniture, or other equipment that is not bolted to the real estate and can be removed. These taxes are paid each year based on original purchase price, depreciation, and the local effective tax rate. Source: CBRE
Close Data center personal property taxes are payable on IT equipment, furniture, or other equipment that is not bolted to the real estate and can be removed. These taxes are paid each year based on original purchase price, depreciation, and the local effective tax rate. Source: CBRE
Data center personal property taxes are payable on IT equipment, furniture, or other equipment that is not bolted to the real estate and can be removed. These taxes are paid each year based on original purchase price, depreciation, and the local effective tax rate. Source: CBRE
Real estate taxes are payable on an annual basis for the data center structure. Real estate taxes are a function of building value and the local effective tax rate. For example, a data center valued at $30 million in suburban Kansas City, Kansas, would see real estate taxes total about $4.6 million over 5 years (or $930,000 annually).

Personal property taxes are payable on IT equipment, furniture, or other equipment that is not bolted to the real estate and can be removed. These taxes are paid each year based on original purchase price, depreciation, and the local effective tax rate. For example, $200 million in IT equipment in suburban Dallas, Texas, would yield about $17 million over a five-year period. It should be noted that personal property taxes would be due for each cycle of equipment purchases. That is, purchases in 2013 would incur personal property taxes from 2013–2017, and purchases in 2017 would have taxes due between 2017 and 2021.

Data Center Incentives
Since 2005, about 17 states have passed legislation to provide customized incentives for data centers. These states provide full or partial exemption of sales taxes for various investment types. The exemptions commonly cover computer (or IT) equipment across the board. Construction, mechanical and electrical equipment, cooling systems, power infrastructure, electricity, and backup fuel are covered to varying degrees by this group of states.

Minimum Thresholds - State incentive benefits for data centers are not necessarily automatic and have certain hurdles or minimum thresholds, which are related to capital investment, direct jobs, payroll or salary, and time period. Following are a few examples:
Expand Since 2005, about 17 states have passed legislation to provide customized incentives for data centers. These states provide full or partial exemption of sales taxes for various investment types. Source: CBRE
Close Since 2005, about 17 states have passed legislation to provide customized incentives for data centers. These states provide full or partial exemption of sales taxes for various investment types. Source: CBRE
Since 2005, about 17 states have passed legislation to provide customized incentives for data centers. These states provide full or partial exemption of sales taxes for various investment types. Source: CBRE
New Activity in 2012 and 2013
The past two years saw activity in the following eight states that either created new incentives programs or tweaked existing programs to lure data centers. Final Thoughts
Over the past eight years, states have increasingly jumped onto the data center bandwagon. States and communities alike want to increase tax revenues, and policymakers are realizing that data centers can be a significant source of new revenue — sometimes even more so than typical economic development projects like headquarters, manufacturing, or distribution centers. While data centers do not directly create large employment opportunities, they do create a significant amount of high-end construction employment for a period that typically runs around 24 months. Additionally, these assets, once built, are a key component of a company’s overall operating environment and can create a long-term investment in a community. Lastly, data centers tend to group together, and it is likely that once a certain geography attracts a big-name user, others will follow (e.g., in Colorado Springs, Raleigh, Des Moines, etc).

Data center owner/operators can see sales tax breaks from select states, property tax abatements covering the facility and equipment, and cash grants to offset public infrastructure improvements. As demand for colocation facilities has increased over the years, some states are starting to allow these facilities and tenants to benefit from incentives that otherwise were only available to enterprise users. Companies are using incentives to help lower the long-term total cost of occupancy, which only helps secure capital approval for projects. Developers are using incentives in certain markets to help lower the rent structure to compete with colocation facilities throughout the United States.