Microsoft, Yahoo Halt Quincy Projects

Microsoft and Yahoo have halted construction on their multi-facility data center campuses in Quincy, Washington while state legislators debate a tax break for data center projects, according to local media reports. 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 "do not produce a product which is sold to the companies' customers" and thus aren't manufacturers.

A story in today's Seattle Post-Intelligencer story, titled "High-tech giants seeking massive tax break," updates the story and takes a critical look at the tax breaks and the business case for data centers in eastern Washington.

Gov. Chris Gregoire requested an exemption in Senate Bill 6666, which would restore the exemption for data centers. In the meantime, the Internet titans have shelved plans for additional investment in Quincy, a small farm town that had 5,300 residents when it was selected for the Microsoft project. Yahoo, Ask.com, Intuit, Sabey Corp. and Base Partners have since announced projects in central Washington. Real estate prices have surged in Quincy, which the Washington post dubbed "the Klondike of the Internet era."

But perhaps not without tax breaks. Yahoo first suggested that it was rethinking the future of its Quincy data center during the project's opening in December. A blog post later emphasized Yahoo's commitment to the new site. But Yahoo co-founder David Filo was more direct in a letter to a state legislator.

"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 the letter to Senate Ways and Means Committee Chairwoman Margarita Prentice.

The Post-Intelligencer said that Microsoft has also halted new construction in Quincy. The company recently completed a 250,000 square foot operations center for Windows Live, but initially planned that facility as the first of three phases of construction that could eventually encompass 1.4 million square feet of data center space.

Microsoft told the P-I that restoration of the tax break was essential as more states offer economic incentives to compete for data center projects.

"States such as Iowa and others have come on board with very attractive tax incentive packages to get data centers to locate in their communities," said DeLee Shoemaker, Microsoft's state government affairs director. "These other states that are in tough economic times and are looking to attract new business and new investments ... Washington state is no longer competitive for this type of business."

The story notes that the server farms generate many temporary construction jobs and "a small number of full-time positions," and also reduce the tax burden on local communities by expanding the property tax base.

Job creation is an area where economic development agencies struggling to sort out the benefits of data centers. Yahoo and Microsoft have hired about 50 full-time workers apiece at their new data centers in Washington, while Google typically hires 200 workers at each new facility.

The P-I story highlights critics who note that data center owners are becoming sophisticated in playing companies off one another, and others who describe data centers as "a drain on state resources" due to their huge energy requirements.

Quincy is a magnet for data centers because of its abundant supply of cheap, "green" hydro power generated by area dams. Microsoft pays just 1.9 centers per megawatt hour for its power in Quincy, compared to rates of 12 cents an hour in Silicon Valley and even higher in the New York market.

Will those huge savings offset the impact of the additional sales tax in the cost/benefit analyses of the Washington state sites? The data center builders aren't disclosing their math at the moment, but are likely to maintain the pressure on state legislators until the Senate bill comes up for a vote.