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Data center tax exemptions would be bigger, broader than other states

December 8, 2015

Article courtesy of MIRS News Service

While some supporters argue the changes are needed to make Michigan competitive, the proposed tax breaks for data centers being considered in the Legislature would be more open-ended and extensive than those in almost any other state, analyses show.

Only New York appears to have tax breaks on data centers as generous as Michigan’s. Other states offer less, if anything at all. 

That includes the state of Nevada, which is home to the technology company Switch. Switch’s plan for a data center campus in Kent County sparked the tax exemption bills now pending in the House. 

In Nevada, data centers’ personal property taxes and sales tax can be abated up to 75 percent for a 20-year period. That’s according to the Nevada Governor’s Office of Economic Development. Michigan’s plan would exempt the equipment from the taxes. 

But, as Switch points out, Michigan isn’t in competition with Nevada for the new campus, which supporters say will bring a $5 billion investment. 

“Obviously, Switch was founded in Nevada, and this is about finding the best state for our eastern U.S. data center presence,” said Roger Martin, Michigan spokesperson for Switch. “Multiple eastern U.S. states have tax policies that support data centers and their clients.” 

Michigan’s proposed exemptions may end up being broader than those in other states for multiple reasons. 

For one, state lawmakers are trying to make the exemptions helpful enough to lure a major company, like Switch, while still creating a level playing field with smaller existing centers. 

Many states have statutory tax benefits for data centers in place but have specifically decided to exclude smaller existing centers. 

To do so, they put a minimum jobs or investment requirement on who can qualify for the benefits. 

For instance, Minnesota requires more than 25,000 square feet of space and a $30 million investment. That qualifies data centers for 20 years of exempted sales and use tax. 

Virginia, a major player in the data center market, requires a $150 million investment and the creation of 50 jobs that pay above the prevailing wage for that state’s sales and use tax exemption. 

By examining state-by-state policies and looking at an Associated Press study of data centers incentives from earlier this year, MIRS counted 20 states that have some form of minimum requirements for accessing their data center tax benefits. 

Rep. Ken Yonker (R-Caledonia), the sponsor of one of the Michigan bills, said he didn’t believe it would be fair to exclude existing Michigan data centers that may not meet minimum thresholds from the upcoming exemptions. 

There are about 38 data centers already operating in the state. 

“What are you going to do with these other people?” Yonker said of the idea of just making an exemption policy for the Switch project. 

According to the national Associated Press report and MIRS search, about 26 other states pursue data centers through specific economic development incentive programs, through general programs aimed at all business or don’t pursue them at all. 

According to the Associated Press, while Oklahoma has long had a sales tax exemption for technology businesses as long as most of their revenue comes from out-of-state, the state also has a data center incentive. 

That incentive can include two five-year property tax exemptions and sales and use tax exemptions. To quality, however, the center has to bring in a $100 million investment and at least 15 high-paying jobs. 

Michigan GOP lawmakers have chosen not to go the incentive route for data centers here because they prefer broader tax changes to lure businesses. 

“This is not an incentive. That’s why you don’t want the requirements,” Yonker said. He continued, “We’re proposing a revamped tax code for an industry that is a growing industry and that we’d like to see get established in Michigan.” 

Yonker also noted that the Switch project would surpass any of the minimum investment and jobs requirements in other state’s policies. 

But other lawmakers are more open to adding job or investment requirements to data center bills. 

A bill introduced in Pennsylvania this summer would exempt data center equipment from that state’s sales tax but would institute job and investment standards there. 

For jobs, the legislation would require a combined minimum employee payroll of $1 million within four years and an investment of at least $25 million or $50 million, depending on the size of the county where the center is going to locate.  

In Michigan, Rep. Jim Townsend (D-Royal Oak) is examining the possibility of adding job requirements to the data center bills here. 

Townsend voted against the House version of the bills – HB 5074, HB 5075 and HB 5076 — in committee this week. 

“The job requirements that we’re finding in other states that have been competing for data centers are a strong argument for including job requirements in our legislation as well,” Townsend said. 

The House bills are currently on the floor. A vote could happen as soon as Tuesday. 

The full Senate approved the Senate version of the bills on Thursday. 

The exemptions proposed by the current Michigan bills may be most comparable to data center exemptions in New York, according to supporters of the Michigan bills. 

There, a 2000 state law exempted data center equipment from the sales tax. 

Also, like the Michigan proposal, data center equipment isn’t subject to a personal property tax in New York. But that’s because there is no personal property tax in New York.

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