Washington State 'Server Farm' Tax Break Fails

Legislation in Washington state that would have restored a tax break for data centers won't be passed in 2008, leaving Microsoft (MSFT) and Yahoo (YHOO) to mull the future of their plans to continue building in the state. Last month Microsoft and Yahoo halted construction on their multi-facility data center campuses in Quincy, Washington while state legislators debated the tax bill.

The tax package was drafted after the state 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. Gov. Chris Gregoire requested an exemption in Senate Bill 6666, which would restore the exemption for data centers. The bill was caught up in tax politics, with media terming it a $1 billion tax break for high-tech giants.

"To be honest, we just didn't have time." Rep. Mike Armstrong, R-Wenatchee told local media. "We'll see what we can do for the next session," which begins in January 2009.

While no one has used the term "bait and switch," it's clear that Microsoft and Yahoo believed they would receive the sales tax break when they made their decisions to build data centers in Quincy. "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," Yahoo co-founder David Filo said in the letter to legislators.

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. Ask.com, Intuit, Sabey Corp. and Base Partners have also announced data center projects in central Washington

Microsoft and Yahoo will now have to wait a year to decide whether to proceed with any additional expansion in Quincy. Microsoft's takeover bid for Yahoo also could play into the decision, as a combined "Microhoo" would have two brand new facilities in Quincy. Each has completed one building, with plans for additional expansion. The big question: will the lack of clarity on tax benefits in Washington state affect data center consolidation decisions if the two firms merge? Stay tuned.