Fighting Back: Big Data Center States Push for More Tax Incentives

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This is the newest data center building at Digital Realty’s northern Virginia campus. State legislators in Virginia recently passed additional tax incentives for data centers to stay competitive. (Photo: Rich Miller).

Financial incentives have been popular among states looking to build a reputation as data center destinations, and to compete with neighboring states. It looks like the growth of incentives is now prompting the traditional data center hubs to beef up their tax breaks. Both Virginia and Texas, already two of the most active data center markets, have recently passed or are working on bills to attract more of these high-tech facilities.

Individual states recognize that data centers are good business, and they’re an increasingly important component of site searches for data center projects. Several states have customized incentives programs for data center operations, which focus on full or partial exemption of sales/use taxes on equipment, construction materials, and in some cases purchases of electricity & backup fuel.

Virginia is for Data Center Lovers

Just a year after revising their existing offerings, Virginia legislators are working on new incentives yet again. Barbara Comstock introduced legislation House Bill 1699, which aims to promote and expand Virginia’s data center industry by providing tax incentives. The bill is intended to “create a separate classification, for purposes of permitting localities to set a lower personal property tax rate, on computer equipment and peripherals used in a datacenter.” It passed in the House of Delegates 95-5 on February 5th.

Senate Bill 1133, identical to the above, introduced by Republican Senator Ryan Mcdougle, was passed in the house 94-4.

"The data center industry is projected to grow by hundreds of millions of dollars in the coming years. This bill will help Virginia continue to be a leader in this 21st century marketplace,” Comstock said in a statement. “Data center jobs and investment are a critical element in diversifying Virginia's technology economy and attracting private sector jobs as federal spending and procurement decreases."

Loudoun County recently announced that 3 million square feet of new data centers are under contract or construction. Loudoun is already home to 5 million square feet of server farms, and estimates that as much as 70 percent of the world’s Internet traffic passes through the county.

Virginia passed its data center incentives in 2009, partly to remain competitive with North Carolina, which has been competing aggressively for major data center projects. The original incentive package had a 2017 sunset date for the expanded sales tax exemptions, but in early 2012 those incentives were updated to extend the tax benefits to 2020 – a key consideration for companies looking to build or lease data centers with an expected lifespan that will include several server refresh cycles.

Comstock has continued to work with the Northern Virginia Technology Council and the tech community to build upon her bill passed last year. The updated incentives passed last year were cited as a key factor in a Capital One project, as well as being a factor in several large leases for DuPont Fabros Technology (DFT).

Tax Incentives Bigger in Texas

Texas has been a strong market in recent years, but apparently feels the need to play defense as other states enact generous exemptions and other incentives for data center owners and operators.There was a lot of talk of potential new tax incentives at the end of last year, and now there is a draft.  Bill HB 1223 was filed on Feb. 12.   

The bill would provide refunds to qualifying data centers on any taxes on the purchase of "tangible personal property," including electricity, power and cooling equipment, backup generators, servers, storage devices, networking gear and software. The refund is eligible to data cener owners, operators or tenants who create at least 20 jobs and spend at least $150 million in Texas on power and improvements to equipment installed at the data center over a four-year period after initial construction or refurbishing of the facility. Qualifying jobs must pay 120% of the county average weekly wage. Republican Harvey Hilderbran from district 53 is the primary on the bill.

Tax incentives remain an integral part of site selection. The moves on the part of both Virginia and Texas suggest that these states can't rest on their leadership laurels, but need to position themselves as attractive options compared to rival states.