Washington Data Center Tax Break Stalls

A tax incentive package designed to keep Yahoo and Microsoft data centers in Washington States has stalled in the state legislature, and supporters of the bill say it appears unlikely to pass this year. That may mean tough decisions for Yahoo and Microsoft, which each halted construction on their multi-facility data center campuses in Quincy while the tax break was being debated.

Washington State speaker of the house Frank Chopp (D-Seattle) said the data center exemption from some state taxes "doesn't seem to have the support" of earlier high-tech tax incentives. The Seattle Post-Intelligencer said Chopp's support "is key for passing anything of substance in Olympia."

Late last year Washington State attorney general Rob McKenna ruled that data centers were no longer covered by a state sales tax break for manufacturing enterprises, and thus must pay a 7.9 percent tax on data center construction and equipment. McKenna ruled that the data centers don't qualify as manufacturing operations. Gov. Chris Gregoire requested an exemption in Senate Bill 6666, which would restore the exemption for data centers. With just days until the Senate releases its budget, the bill's passage doesn't appear imminent and its economic impact - $13.4 million in the 2010 budget year, and growing to $33 million by 2013 - is not accounted for in the budget.

Quincy and nearby Wenatchee and Moses Lake are home to data center projects for Microsoft (MSFT), Yahoo (YHOO), Ask.com, Intuit (INTU), Sabey Corp. and Base Partners.

Yahoo co-founder David Filo said his company, which just completed a data center in Quincy, may consider shifting its planned second phase to another location.

"An unexpected requirement to pay sales tax will destroy the competitive advantage that led Yahoo to select Quincy as the location for our latest facility, and in fact swings the decision strongly in favor of freezing construction in Washington, and building instead in Oregon (which has no sales tax), as some of our competitors are already doing," Filo said in a letter to Senate Ways and Means Committee Chairwoman Margarita Prentice.

Microsoft has also shelved further expansion in Quincy. The company recently completed a 250,000 square foot operations center for Windows Live, but has planned three phases of construction that could eventually encompass 1.4 million square feet of data center space.

Some opponents of the legislation contend that the economic advantages presented by cheap power in central Washington offset the tax benefits, and the data center operators would be likely to stay, even without the tax breaks. Will the $10 million industry tax benefit in 2010, viewed in the larger operational costs of Washington's data center industry, be a deal breaker for the Quincy-area projects? If Yahoo and Microsoft were campaigning for subsidies they don't need, legislators may be ready to call their bluff. If the failure of the tax breaks derails further construction in Washington State, there's always Iowa.