Texas Private Letter Ruling 201507252L: For the 'large' data center exemption (as opposed to the standard qualifying-data-center exemption), when must the $500 million capital-investment agreement be made, how long does the exemption last, and what equipment and jobs qualify?

Plain-English summary

Texas has two different data-center sales-tax exemptions: the long-standing "qualifying data center" exemption (Tax Code § 151.359, seen in several other rulings in this corpus) and a separate, bigger "large data center project" exemption (§ 151.3595) added for projects with a much higher capital-investment bar. This ruling addresses the newer, larger exemption.

The taxpayer, a subsidiary of a public parent company, planned to build one to three large data-hosting buildings (250,000+ total square feet) on contiguous land, with a $500 million capital investment over five years, at least 20 megawatts of contracted power, and at least 40 new full-time jobs. The Comptroller answered seven specific questions:

1. Timing of the $500 million agreement. The taxpayer's agreement to invest at least $500 million must be entered into on or after May 1, 2015 (the statute's effective-date requirement), with the investment actually made over the five years starting when the taxpayer files its certification application.
2. Length of the exemption. The exemption begins the day the Comptroller certifies the project and lasts until the 20th anniversary of certification.
3. What equipment qualifies. Electricity for data halls/admin areas, servers, network gear, fiber, power and cooling equipment, backup generators, fire suppression, security equipment, and electrical substations, plus other "necessary and essential" equipment matching the statute's definitions.
4. Building/land layout. One to three structures totaling at least 250,000 square feet on contiguous parcels meets the statute's physical-project definition.
5. Electrical substations and the investment threshold. Even if a substation sits in a separate structure from the main buildings, its construction costs can count toward the $500 million threshold and its equipment can qualify for the exemption, AS LONG AS it's dedicated to the project and located on the same contiguous parcels — though its square footage doesn't count toward the 250,000-square-foot minimum if it's outside the qualifying buildings.
6. What counts as a "full-time" qualifying job. At least 1,820 hours a year, meaning roughly 35 hours a week for 52 weeks.
7. Hosting services to the parent and its affiliates/end-users. Providing data hosting to the parent company, its affiliates, and end-users doesn't violate the "single qualifying occupant" rule, as long as the taxpayer isn't subleasing servers or server space to third parties.

What this means for you

Companies planning a "large" data center project (not the standard qualifying data center)

Don't assume the standard § 151.359 qualifying-data-center rules apply — the § 151.3595 "large" project exemption has its own, higher thresholds ($500 million investment, 20 MW power, 250,000+ sq ft) and its own May 1, 2015 investment-agreement date cutoff. Get your capital-investment agreement dated correctly, since an agreement made before the statutory date won't count.

Developers building on-site electrical substations

A separate substation building's construction costs and equipment can still count toward your $500 million threshold and your exemption, provided the substation is dedicated to the project and sits on the project's own contiguous land — but its square footage won't help you hit the 250,000-square-foot building-size requirement if it's a standalone structure.

Parent companies hosting data for affiliates through a subsidiary

Providing hosting services to your parent company, its affiliates, and even outside end-users doesn't break the "single qualifying occupant" requirement — the line the Comptroller draws is against subleasing servers or server space to third parties, not against providing hosting services to them.

Common questions

Q: Is this the same data-center exemption seen in other Texas rulings about 250,000-square-foot qualifying data centers?
A: No — per this ruling, § 151.3595's "large data center project" exemption is a separate, higher-threshold exemption (requiring a $500 million investment and 20 MW of power) from the standard § 151.359 qualifying-data-center exemption.

Q: How long does the large-data-center exemption last once certified?
A: Per this ruling, 20 years from the date the Comptroller certifies the project.

Q: Does hosting data for my parent company's affiliates break the "single occupant" rule?
A: Not per this ruling, as long as you don't sublease servers or server space within the qualifying data center to third parties.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.3595 (Temporary Exemption for Large Data Center Projects)
• Tex. Tax Code § 151.359 (standard Qualifying Data Center exemption, referenced for contrast)
• 34 Tex. Admin. Code Rule 3.335 (Qualifying Data Centers — to be amended per this ruling to incorporate § 151.3595)
• 34 Tex. Admin. Code Rule 3.1; Rule 3.10 (Taxpayer Bill of Rights — detrimental reliance)
• Tex. Local Gov't Code, Chapter 380 (municipal economic development agreements, referenced re: the taxpayer's separate agreement with a home-rule municipality)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201507252L

Original ruling text

July 7, 2015

Re: Private Letter Request No. 151600647

Dear *****:

This letter is issued in accordance with Rule 3.1, Private Letter Rulings and

General Information Letters, in response to your correspondence dated June 5,

2015, requesting a private letter ruling related to the temporary exemption for

large data center projects set out in Texas Tax Code Section 151.3595.

Detrimental reliance is provided in accordance with Rule 3.10, Taxpayer Bill of

Rights.

Facts Presented:

***** (Taxpayer) is a wholly owned subsidiary of a publicly traded parent

company (Parent). The Taxpayer is disregarded for federal income tax purposes.

Taxpayer intends to construct at least one and as many as three rectangular

structures comprising at least 250,000 total square feet of space on contiguous

parcels of land commonly owned by Taxpayer. The structures are specifically

designed to house networked computers, data and transaction processing

equipment, and related infrastructure. The proposed large data center project

will be used to provide data center services to Parent and Parent’s affiliates.

The proposed large data center project will not be subject to an agreement

limiting the appraised value of the proposed data center’s property under Tax

Code, Chapter 313, Subchapter B or C. Taxpayer will, however, enter into a

Chapter 380 agreement [ENDNOTE 1] with a home rule municipality with respect to

the data center.

The proposed large data center project will have a complete fire alarm system,

which will include sprinklers and fire smoke dampers. Physical security will

be in place to restrict access to the data center in addition to video

surveillance and electronic systems to monitor the site. The proposed large

data center project will include one or more separate electrical substations

that will connect the data center to its electrical supply.

Equipment purchased for use within the proposed large data center project will

include, but not be limited to, computer servers, chassis, storage heads, flash

storage cards, network switches, routers, blades, racks, and miscellaneous

server components. The equipment will be purchased from persons or legal

entities not related to the purchaser by ownership or common control.

Taxpayer intends to make a total capital investment of at least $500 million

over a five-year period and agrees to contract for at least 20 megawatts of

transmission capacity for operation of the proposed data center campus. The

proposed large data center project will create at least 40 new jobs (each

consisting of 1,820 annual hours of employment and paying at least 120 percent

of the county average weekly wage in which the large data center project will

be located). The new jobs may include a mix of both Taxpayer employees and

third-party contract employees permanently assigned to the large data center

project location under a written contract with the third-party employer with

shared employment responsibilities. The new jobs will exist for at least five

years from the date created. Additionally, the jobs created by Taxpayer will

be new to the county in which the proposed large data center will be located

and not involve an existing employee of Taxpayer or Parent transferred from

another county in Texas and all employees of such positions will be issued a

W-2.

Neither Taxpayer nor Parent are telecommunications providers, and the proposed

large data center project will not be used to primarily provide

telecommunications services. Taxpayer will provide data hosting services to

Parent with remote access to the data available to Parent. Consideration for

such services will be paid by Parent to Taxpayer in an “arm’s-length”

transaction. Parent will not control the manner, means, or method by which

Taxpayer provides its services.

The platform hosted by the proposed large data center project will include

websites, applications, and systems that facilitate the sharing of data between

end-users, and the sale, development, and delivery of content, and any related

processes or technology that relates to facilitating communication among

end-users and serving advertisements.

Rulings and Analysis:

Rule 3.335 relating to qualifying data centers and their related exemption set

out in Tax Code Section 151.359 will be amended to address and incorporate

qualifying large data center project requirements and their associated

exemption as set out in Tax Code Section 151.3595.

Subject to the filing of the Texas Application for Certification as a

Qualifying Large Data Center as the qualified owner, operator, and occupant,

the following responses are provided below after the requested rulings.

1. The proposed large data center project meets the prerequisites for

being certified by the Comptroller as a “Qualified large data center project,”

and therefore qualifies for the temporary sales and use tax exemption for

property used in certain large data center projects.

RESPONSE: The eligibility requirements for the temporary exemption for

qualified large data center projects are set out in Tax Code Sections

151.3595(d) and (j). The only requirement not clearly addressed based on the

facts presented is the date Taxpayer made, or agreed to make, a capital

investment of at least $500 million in the proposed large data center project.

Tax Code Section 151.3595(d)(2)(B) requires the qualifying owner, qualifying

operator, or qualifying occupant, independently or jointly, on or after May 1,

2015, to make or agree to make a capital investment of at least $500 million in

the proposed large data center project.

The information provided by the Taxpayer indicates that a capital investment of

at least $500 million over a five-year period will be made. In order to meet

the capital investment requirement of Tax Code Section 151.3595(d)(2)(B),

Taxpayer’s agreement to make the capital investment may not be entered into

prior to May 1, 2015 and the Taxpayer shall make the required capital

investment over a five-year period beginning on the date Taxpayer submits an

application under Tax Code Section 151.3595(e). If Taxpayers capital

investment meets these conditions, then the Taxpayer meets the requirements for

a qualified large data center project and an application submitted in

accordance with Tax Code Section 151.3595(e) would result in the project being

certified and the issuance of a registration number for the qualified large

data center project and the related qualifying owner, operator, and occupant,

as applicable.

2. The temporary sales and use tax exemption for property used in certain

large data center projects begins on the date the proposed data center project

is certified by the Comptroller as a qualifying large data center project and

expires on the 20th anniversary of that date.

RESPONSE: The temporary sales and use tax exemption for property used in

certain qualifying large data center projects begins on the date the proposed

qualifying large data center project is certified by the Comptroller as a

qualifying large data center project and expires on the twentieth anniversary

of the certification pursuant to Tax Code Section 151.3595(f).

3. Identified purchases made by Taxpayer of tangible personal property

necessary and essential to the operation of the large data center project will

qualify for the temporary sales and use tax exemption for property used in

certain large data center projects.

RESPONSE: Purchases subject to the temporary exemption, as well as those that

are not, are set out in Tax Code Section 151.3595(b) and (c), respectively

The following equipment identified by Taxpayer that is necessary and essential

to the operation of the qualifying large data center project and purchased for

installation at, incorporated into, or, in the case of electricity, used at the

qualifying large data center project is eligible for the temporary exemption:

• Electricity to power the data halls and administrative areas

• Computer servers and miscellaneous components

• Network equipment and miscellaneous components

• Fiber optic infrastructure

• Power equipment

• Cooling equipment

• Backup generators

• Fire suppression equipment

• Security equipment

• Electrical substations

Taxpayer also identified “data center infrastructure support equipment” and

“infrastructure supporting an evaporative cooling system” as equipment which

will be purchased for installation at or incorporated into the qualifying large

data center project. It is unclear what items of tangible personal property

are included within this term.

The infrastructure support equipment qualifies for the temporary exemption to

the extent the equipment is necessary and essential to the operation of the

qualifying large data center project and meets the definition of equipment, as

set out in Tax Code Section 151.3595(b)(1)-(13).

4. The proposed large data center project, which will be comprised of at

least one and as many as three large rectangular structures which in total will

comprise at least 250,000 square feet of space located on contiguous parcels of

land commonly owned by Taxpayer, will meet the prerequisites of Texas Tax Code

Section 151.3595(a)(2)(B).

RESPONSE: That is correct, proposed construction will meet the prerequisites

of Texas Tax Code Section 151.3595(a)(2)(B).

5. The costs and purchases associated with the construction and equipping

of the electrical substations are properly included in the calculations used in

meeting of the $500 million capital investment threshold and are subject to the

temporary sales and use tax exemption.

RESPONSE: Taxpayer intends to have “one or more separate electrical

substations, which will connect the data center campus to its electrical

supply.” It appears the electrical substations will be in structures separate

from the buildings comprising the data center project.

Tax Code Section 151.3595(a)(2)(F) defines a large data center project as a

project which “has an uninterruptible power source, generator backup power, a

sophisticated fire suppression and prevention system, and enhanced physical

security that includes restricted access, video surveillance, and electronic

systems.” Tax Code Section 151.3595(b) exempts from the sales tax “…tangible

personal property that is necessary and essential to the operation of the

qualifying large data center project… if the tangible personal property is

purchased for installation at, incorporation into, … a qualifying large data

center project…”

As a qualifying large data center project is defined has having an

uninterruptible power source and generator backup power and the exemption

requires that the tangible personal property be purchased for installation at

or incorporation into a qualifying large data center project, it is not

unreasonable to consider separate electrical substations as part of the

required capital investment and temporary sales and use tax exemption if the

electrical substations are dedicated to the qualified large data center project

and are installed at, meaning on the single parcel of land or on the contiguous

parcels of land which house the qualified large data center project.

If this is the case, then the associated costs of construction of the

electrical substations are eligible for inclusion in the total capital

investments provided the costs meet the definition of capital investment set

out in Rule 3.335(a)(1). Additionally, purchases to equip the electrical

substations qualify for the temporary exemption to the extent the equipment

meets the definition of equipment, as set out in Tax Code Section

151.3595(b)(1)-(13). However, when the electrical substations are outside the

buildings that house the qualified large data center project, the square

footage of the electrical substations do not count towards the 250,000 square

feet criteria.

6. A “full-time” job for the purposes of Texas Tax Code Section

151.3595(a)(4), is a job that provides for at least 1,820 hours annually and at

least 35 hours of employment per week.

RESPONSE: A qualifying job as defined by Tax Code Section 151.3595(a)(4), in

relevant part, is a full-time, permanent job that pays at least 120 percent of

the county average weekly wage in the county in which the new job is based. A

permanent job as defined by Tax Code Section 151.3595(a)(3) means an employment

position that will exist for at least five years after the date the job is

created.

A qualifying job as defined by Rule 3.335(a)(7), in relevant part, is a new,

full-time job created by a qualifying owner, operator, or occupant and that

“will provide at least 1,820 hours of employment a year to a single employee.”

A job that provides at least 35 hours of employment per week for 52 weeks will

meet the requirement of 1,820 hours per year.

7. The hosting services provided by the Taxpayer to Parent and its

affiliates, and to end-users, with respect to the proposed data center campus

will not violate the single and sole occupant requirement of Tax Code Section

151.3595(a)(2)(D).

RESPONSE: Tax Code Section 151.3595(a)(2)(D) provides a large data center

project means a project that is used by a single qualifying occupant for the

processing, storage, and distribution of data. The term “single” means one

qualifying occupant.

The term qualifying occupant as defined in Rule 3.335(a)(10) is defined, in

part, as the sole occupant of a qualifying data center. It further provides a

“qualifying occupant may provide data storage and processing services, but may

not sublease to a third-party any real or tangible personal property located

within the area of a building designated by the qualifying occupant, qualifying

owner, or qualifying operator as part of the qualifying data center.”

By way of example, Rule 3.335(a)(10)(B) further states “a qualifying occupant

may not sell or lease excess servers or server space, including the provision

of dedicated servers, at the qualifying data center to third parties.”

The hosting services, as described by Taxpayer, do not violate the single

qualifying occupant requirement set out in Tax Code Section 151.3595(a)(2)(D).

The services fall within the allowable use of a qualifying large data center

project as set out in Tax Code Section 151.3595(a)(2). There was no indication

in the information provided that the servers or server space, including the

provision of dedicated server space, will be leased to a third party.

If you have any questions about this private letter ruling, please email us at

https://www.window.state.tx.us/taxhelp/ and reference Private Letter

Ruling #151600647.

Sincerely,

Tax Policy Division

ENDNOTES:

1.Local Government Code, Chapter 380 agreements relate to economic development

programs into which certain municipalities may enter to promote state or local

economic development and to stimulate business and commercial activity in that

municipality.