More than half of U.S. states offer targeted tax incentives to attract data center investment, recognizing the sector’s economic impact in job creation and long-term digital infrastructure growth. Wade Holt, Senior Director of Tax at CoreSite, breaks down tax incentives, how they work and how CoreSite data center customers in Illinois and Virginia can benefit.
Q. What are tax incentives?
A. Wade: Tax incentive programs can be available at the federal, state and/or local levels and are intended to stimulate economic development and growth as well as create new jobs. They are a targeted, measured and strategic path to an expected overall economic benefit. They are not simply giveaways or handouts. In short, tax policies are key in driving fiscal objectives. For example, if areas are underdeveloped – raw land or old, downtrodden properties – these areas may be targeted for improvement so they can generate tax revenue, which legislatures can then determine how to allocate to government expenditures and community programs.
Q. What types of incentives do states offer?
A. Wade: Incentives vary by state. Legislators design programs they think will attract businesses and accomplish their development objectives. Examples include:
- Sales and use tax exemptions applying to the purchase of equipment and materials.
- Reduction in property taxes for a certain amount of time.
- Credits against corporate income tax liability, often directly relating to a business’ job creation, capital investment and/or research and development.
These incentives would then generally be tied to certain obligations of the business to achieve and maintain, including, but not necessarily limited to:
- A minimum amount of capital spend.
- A minimum number of new jobs created, generally earning a defined percentage higher than an area’s prevailing wages.
- Complying with green energy building programs such as ENERGY STAR, BREEAM, LEED and ISO 500001. CoreSite typically complies with ENERGY STAR requirements.
- Building to a minimum Tier IV-level data center operation. Tier IV data centers provide the highest level of reliability and redundancy, which are critical in supporting the digital communications – like 911 services, personal or business banking transactions, medical research and social media – that are facilitated by colocation data centers.
Policymakers weigh potential initial forgone tax revenue against the benefit a business may generate from a greater future tax base on both a stand-alone basis and in its success in attracting other businesses and customers. A high-level illustration: consider two jurisdictions that are competing for capital investment by a colocation data center developer. Neither one has a revenue stream related to a data center. One provides an incentive and the other does not. The incentive is not coming “out of pocket” because the revenue is not being generated by taxes to begin with.
In a vacuum, a colocation data center will likely go into the incentive area. And ultimately, incentives expire where the idea is “we will not collect a certain level of tax on your property until some later date,” when property values will likely be higher, generating higher taxes, and will have presumably attracted customers who will have also become taxpayers. That temporary initial benefit can lead to a much larger future benefit that is locked in because established businesses are not likely to pick up and move elsewhere.
Q. How do incentive programs work for data centers?
A. Wade: More than 30 U.S. states offer incentives to data centers, and some programs allow the tenants in multi-tenant colocation data centers to participate. Data centers must follow a regimented process contained in a memorandum of understanding, or MOU. The MOU is a contractual agreement that is typically a requirement of the State statute that sets out the terms and requirements which include some combination and measurement of the capital spend, new jobs and environmental obligations mentioned earlier.
Q. How do CoreSite’s tenants participate in tax exemption programs?
A. Wade: We currently hold data center incentive program MOUs with two states, Illinois and Virginia. Both the Illinois program and the Virginia program target sales and use tax savings. If tenants choose to participate, they complete a participation agreement form that makes them part of the original MOU between the jurisdiction and CoreSite where they become subject to the same contractual provisions of the MOU and contribute to the overall objectives of the MOU.
Tenants do not have to qualify individually to participate in the program because thresholds like the minimum capital spend and number of jobs are met collectively by CoreSite and the participating tenants. There are claw-back provisions in MOUs that would trigger in the event qualification thresholds are not reached. Both existing MOUs for CoreSite and participating tenants, though, have met or exceeded the contractual thresholds to maintain the incentive.
Customer participation in these programs can provide meaningful savings on their cost of equipment. Some tenants, though, would fairly pass on participation due to their tax status as a 501(c)(3) or government entity and who are already not subject to sales and use tax. Currently, Fairfax County in Virginia charges a sales and use tax of 6% and Chicago charges 10.25%. Meaning, by spending $100K on qualifying purchases, you save $6,000 or $10,250, respectively.
There is an annual reporting requirement under the MOUs that CoreSite takes responsibility for. We gather information from our tenants about capital investments, jobs and other MOU requirements and combine the numbers into one report. Tenants are only required to keep accurate records in the event of an authoritative review.
Q. What are the primary factors currently considered for data center tax incentives in the U.S.?
A. Wade: There are many moving parts and ever-changing legislative landscapes locally, statewide and federally that affect tax incentives for data centers. Some states and communities have welcomed data centers because they support economic growth and long-term tax revenues associated with data center developments and operations. More broadly, businesses will locate in areas that are considered “business friendly” and data centers are no different.
Legislators and community members consider a lot of factors, including the relative merits of property use, whether that be an abandoned factory, a vacant lot or a business that generates tax revenue. And while it may be a positive use of tax funds for a surrounding area, there is generally no direct tax benefit, for example, in converting an abandoned factory or empty lot into a park.
Tax officials recognize how a tax exemption is a trade-off. Even though it is more difficult to measure against the direct tax considerations of an incentive provided, a boon to the local economy during development could be anticipated where the construction crew we bring in spends money at area food trucks, restaurants, gas stations, grocery stores and retail shops. And then after the data center is built and operating, the employees can be expected to continue to spend locally. It is also worth keeping in mind how their jobs are high paying and likely providing them with more disposable income to do so.
Every year, data centers pay a significant amount of state and local taxes, such as real property taxes. Business taxes support funding of community services like education, healthcare and public transportation. So, legislators and communities will be balancing fiscal objectives when they weigh tax policy against current and future resource desires.
Q. Final thoughts?
A. Wade: I like to associate this complex topic with the commonly accepted philosophy of a ‘rising tide lifts all boats’ – in other words, improving a local economy through business investment and the associated increases in the overall state and local tax base, benefits all members of the community. Thinking along this line, tax incentives are part of the tide. They are not a gift. You are not giving away something you already have. It is intended as a mutually beneficial relationship with the goal of encouraging investment and stimulating economic growth for the long-term benefit of the general public. Data centers can achieve this by committing heavy investment and creation of new jobs to an area and delivering on contractual economic and environmental targets to maintain an MOU and act as a good corporate citizen.
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