Amazon May Get Tax Break for Poor With Data Center Build in Richest County

David Kocieniewski (Bloomberg) -- Amazon.com Inc. walked away from billions of dollars of public subsidies when it announced Thursday it was abandoning plans for an office complex in New York. But it can still qualify for federal tax breaks intended to help distressed communities by building a new Virginia data center in America’s wealthiest county.

On a densely wooded field near Dulles International Airport in Loudoun County, about 30 miles west of Washington, the company and its development partners are preparing to build a facility for its rapidly growing Amazon Web Services cloud computing business. AWS went into contract on the 107-acre property last year, after top Amazon executives held at least two meetings with Virginia Governor Ralph Northam, who subsequently selected the area as a “qualified opportunity zone.” That designation will entitle Amazon and its partners to claim millions of dollars in federal tax breaks.

Northam, embroiled in a scandal over a racist photo published on his medical school yearbook page, said through a spokeswoman that he didn’t discuss the tax break with Amazon executives, nor did he choose the area as an opportunity zone to help Virginia woo Amazon and win its national competition for a second headquarters, known as HQ2. A site in the same census tract as the data center was one of four in Virginia pitched to the company.

Related:Why the Northern Virginia Data Center Market Is Bigger Than Most Realize

Likewise, Matt Hurst, an Amazon spokesman, said the opportunity zone designation was never discussed with Virginia officials and played no role in the company’s decision to build a data center in Loudoun County.

The tax subsidy available to AWS and its partners in Loudoun County, which hasn’t been reported previously, is the latest to raise questions about whether the opportunity zone program may become a giveaway to wealthy individuals and corporations that expand in relatively affluent areas. Amazon drew criticism in November for deciding to build in an opportunity zone in the gentrifying Queens neighborhood of Long Island City. It announced last month that it wouldn’t avail itself of the perk there, before saying it was scuttling plans for the new office altogether.

Hurst declined to comment on whether Amazon may forgo the opportunity zone subsidy in Loudoun County, saying that AWS doesn’t disclose or discuss details about its data centers. Because AWS won’t reveal the  cost of the data center or the source of the development funding, it’s impossible to determine the size of the potential subsidy.

Reducing Taxes

Related:Greenpeace Accuses AWS of Fueling Virginia Data Center Growth with Dirty Energy

Opportunity zones were created as part of the Trump administration’s December 2017 tax bill and allowed governors to select as many as a quarter of their census tracts to qualify for the subsidies. For a limited time, investors who develop real estate or fund businesses in opportunity zones are able to defer capital gains on profits earned elsewhere and completely eliminate them on new investments.

Like many states, Virginia chose a mix of poor and better-off areas, including two in Loudoun County, which had a median household income of $135,842 in 2017, according to the U.S. Census Bureau. That’s more than double the national average and the highest of any county in the nation. Income in the tract where Amazon is building its data center was $88,657, the second-highest of the Virginia zones selected.

Many details of the negotiations haven’t been released publicly because Amazon required community officials involved in the HQ2 project to sign non-disclosure agreements. But a review of public documents, as well as interviews with more than a dozen people involved in the deals, indicates that negotiations with Amazon about the data center and the new headquarters were closely aligned.

The site AWS chose for the data center in September 2018 adjoins a larger tract of land Virginia was pitching to Amazon as one of four possible locations for HQ2. The Loudoun County economic development official who nominated the census tract as an opportunity zone, Buddy Rizer, had been talking to Amazon executives about both the data center and HQ2. Rizer said he considered the matters separate because he didn’t believe Amazon would be able to use the opportunity zone credit at either HQ2 or the data center, and he said he never discussed the matter with Amazon officials.

‘Deceptive Packaging’

The overlap between the two processes illustrates one of the central criticisms of the opportunity zone program: The law and Treasury Department regulations surrounding it are so loosely written that they permit state and local officials to use federal dollars to curry favor with prosperous companies rather than focus solely on helping blighted communities.

“The idea that a company headed by the richest person on the planet could get a tax exemption in the richest county in the country completely summarizes the deceptive packaging of the whole program,” said Greg Leroy, executive director of Good Jobs First, a Washington-based labor-funded organization critical of corporate subsidies. “Poor people are the bait. But the switcheroo is that the rich people get all the government handouts.”

The data center, the tax break and the HQ2 competition all converged on a few hundred acres of land surrounding an active quarry straddling the border of Loudoun and Fairfax counties. With its proximity to Dulles, as well a new stop planned for the expanding Washington Metro, local officials considered the property a jewel and envisioned it being developed with businesses creating thousands of high-paying jobs.

The owners of the quarry, Chantilly Crushed Stone Inc., had other ideas. They planned to close the quarry, turn it into a lake and build a mixed-use project called Waterside, with an assortment of retail, housing, office buildings and hotels. In 2014, when Loudoun County planning officials rejected parts of the Waterside proposal, saying it wouldn’t stimulate enough job creation, company representatives flashed a slide of Fred Flintstone riding a dinosaur on a projector screen at a public hearing and threatened to expand the mining business, condemning the site to a “Stone Age” future.

HQ2 Competition

Plans for Waterside were slowly moving forward in 2017, when Amazon’s HQ2 competition helped the county and the company find common ground.

An HQ2 proposal was drawn up by Loudoun and Fairfax counties -- Fairfax has the nation’s second-highest median household income -- re-imagining Waterside as a futuristic and ecofriendly “tapestry of nature and urbanism.” The proposal for the 338-acre campus called for Amazon office buildings as well and 6,000 apartments.

The architect’s rendering also showed a parcel of the original Waterside plan, across the street from the proposed HQ2 site, next to an arrow touting its proximity to Amazon data centers.

Chantilly Crushed Stone officials didn’t respond to calls and emails seeking comment, and the law firm representing the project declined to comment.

That proposal was one of 20 finalists for HQ2 that Amazon selected from across the country in January 2018, five days after Northam’s inauguration. During his first month in office, the Democrat also hosted a meeting that had been requested by the head of one of northern Virginia’s most prosperous and powerful businesses: Amazon Web Services.

Internet Traffic

Over the past two decades, the area has emerged as a preeminent location for data centers, with more than 120 facilities, including some run by tech giants Google, Microsoft Corp., Facebook Inc. and Apple Inc. County economic development officials estimate that 70 percent of the world’s internet traffic passes through Loudoun County.

AWS was already one of Loudoun County’s biggest taxpayers, and the company was gearing up to do more. But as heartened as members of Northam’s team were about AWS expanding in Virginia, they were also frustrated that the meeting wouldn’t touch on a far bigger prize: HQ2. Data centers create about 60 jobs per building; HQ2 promised as many as 50,000 jobs, as well as a $5 billion investment from Amazon.

Because Amazon had forbidden elected officials from lobbying for the project, Northam’s presence at the meeting meant that HQ2 was off limits.

“It was the thing on everyone’s mind,” said Stephen Moret, president and chief executive officer of the Virginia Economic Development Partnership, who was the point man on the state’s HQ2 effort for both Northam and former Governor Terry McAuliffe. “But we knew what the rules were.”

During the meeting with Northam and his top aides, AWS CEO Andy Jassy discussed some of the things that made AWS happy in northern Virginia -- cheap power, a highly educated workforce and proximity to the data hub where more than 200 networks exchange traffic. At one point, Moret said, Jassy also asked about tax breaks. AWS wanted assurance that Virginia would continue the sales and use-tax exemptions for data centers.

Moret said he didn’t recall any request by AWS for the new opportunity zone tax benefit, which had been announced but was still being put in place. The Amazon spokesman said that the perk wasn’t among the tax breaks Jassy discussed at the meeting.

Choosing Zones

Rizer, the Loudoun County development director, is widely credited with the strategy that won the data centers. He spoke with Amazon about those projects and about HQ2, while behind the scenes he pushed for the opportunity zone designation.

The talks with AWS to build new facilities began months before Northam took office, Rizer said in an interview. When Amazon executives came to Virginia last February to tour the Waterside site and three other HQ2 contenders, both Rizer and Northam met with them.

A few weeks later, Rizer sent the governor a list of eight Loudoun County census tracts he recommended for the opportunity zone program. Northam chose two, according to state records, including a tract that included both the proposed HQ2 site and the parcel across the street.

The Treasury Department approved Virginia’s selections in May. The next month, AWS was in contract to purchase and develop the property for a data center.

Rizer was adamant in saying that “the HQ2 project was not and is not connected to the data center.” But not everyone is convinced the two deals were unrelated.

After AWS agreed to build the data center next to Waterside, it was viewed by some as a sign that Loudoun County might be a favorite for HQ2. Instead, Amazon picked a site in Crystal City, Virginia, one not in an opportunity zone, for part of its HQ2 project. When Amazon announced it was pulling out of Queens, and said it had no plans to reopen the HQ2 search, some analysts speculated that the company might consider expanding in Loudoun County.

“We have no statement on the Amazon situation with New York,” Rizer said in a written statement on Thursday. “We have made great progress in marketing our site to potential users. As always, we will be very aggressive in chasing any and all opportunities.”