As the owner of a data center campus, does the Comptroller treat a tenant's expansion data halls in a newly built, separate building as part of the same already-certified qualifying data center?

Plain-English summary

This ruling is a companion, issued the same day, to a separate private letter ruling addressing the same underlying facts and expansion plan — but this one was requested by (and addresses the rights of) the owner/landlord of the 70-acre data center campus, while the companion ruling addresses the data-hall occupant/tenant's side of the same transaction. The campus has seven existing buildings (642,000+ square feet, fully leased), and the owner planned three new buildings to nearly double capacity. The tenant's existing lease (six data halls, 7.2 MW, one building) was already certified as a qualifying data center, with the tenant holding an option to add two more data halls — but with no room left in the certified building, the added halls would go into one of the new, physically separate buildings, connected to the original via shared conduits, wiring, access control, and power.

Just as in the tenant's ruling, the Comptroller told the owner: the expansion space in the new building does not become part of the already-certified qualifying data center. Section 151.359(a)(2) defines a data center as space in a "single" building, and functional or physical integration between separate structures doesn't satisfy that plain-meaning requirement. As a result, capital investment made in the new building isn't creditable toward the exemption's capital-investment threshold for the existing certified facility, and tangible personal property or electricity purchased for the new building isn't exempt as part of that facility (with a predominant use study needed if electricity is drawn from a shared meter spanning both spaces).

The one carve-out that favored the taxpayers: qualifying jobs created in the new expansion building still count toward the overall job-creation requirement, because a qualifying job under Section 151.359 only needs to be located in the same county as the certified data center — not physically inside the certified building.

What this means for you

Data center campus owners/developers

If you're building additional structures to accommodate a tenant's growth, don't assume connecting the new building to an already-certified data center (via shared infrastructure) lets the new space inherit that certification. Plan for a fresh single-building analysis — and potentially a separate certification process — for each new structure.

Data center tenants negotiating expansion options

Coordinate with your landlord early: if your lease option to expand depends on staying within a single certified building, confirm there's actually room, since spilling into an adjacent-but-separate structure resets the exemption analysis for capital investment and TPP/electricity, even though your job-creation count isn't affected.

Accountants and tax professionals

This pair of same-day rulings (issued separately to landlord and tenant on identical facts) is a useful illustration of how the Comptroller will sometimes issue mirror-image private letter rulings to each party in a transaction — each binding only as to that specific taxpayer, even where the facts and legal analysis are identical.

Common questions

Q: Why are there two nearly identical rulings for the same facts?
A: A private letter ruling only binds the Comptroller as to the specific taxpayer who requested it. Here, both the campus owner (landlord) and the data hall occupant (tenant) separately requested guidance on the same expansion plan, so the Comptroller issued each of them their own ruling.

Q: Does connecting a new building to the certified data center via shared power/wiring help satisfy the single-building requirement?
A: No. The Comptroller held that physical connection and functional integration don't overcome the statute's plain requirement that a data center be space within a single building.

Q: Do jobs in the new building still count toward the exemption's job-creation requirement?
A: Yes — a qualifying job only needs to be in the same county as the certified data center, not physically housed within the certified building.

Q: Can another campus owner or data center tenant rely on this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to this taxpayer and these facts, and cannot be relied upon by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.359(a)(2) (data center defined as single-building space)
• Tex. Tax Code § 151.359(a)(5), (b), (d)(2) (qualifying job; exemption; job/capital investment requirements)
• 34 Tex. Admin. Code Rule 3.335(a)(1), (a)(6), (a)(7), (b)(1) (data center certification, capital investment, qualifying job, predominant use)
• 34 Tex. Admin. Code Rule 3.295 (natural gas/electricity predominant use)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Related ruling discussed:

• Companion ruling issued the same day to the data hall occupant/tenant on the identical expansion plan (STAR 201510543L)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201510542L

Original ruling text

October 16, 2015

Re: Private Letter Ruling #142740061

**, Tax ID ****

Dear *****:

We issue this private letter ruling in accordance with Rule 3.1 in response to your request dated September 30, 2014. Detrimental reliance is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the Comptroller’s interpretation of the exemption for qualifying data centers, set out in Tax Code Section 151.359, as it relates to the expansion of an existing qualified data center.

Facts Presented

***** (“Taxpayer”) is the owner of a 70-acre campus being redeveloped as a data center park. The campus has seven buildings consisting of more than 642,000 gross square feet that is currently leased to capacity. Taxpayer plans to build three new buildings on the campus in an effort to almost double the available square footage. Each building is constructed so that it may be divided to contain multiple discrete data halls which can be networked together.

Taxpayer and COMPANY A signed a lease for an initial term of eleven years and which covers six data halls with 7.2 MW of power. The six data halls are contained within a single building. The leased space was certified as a qualifying data center pursuant to Rule 3.335, the “COMPANY A Data Center”, with Taxpayer as the “qualifying owner” and COMPANY A as the “qualifying occupant”. The COMPANY A lease includes an option for COMPANY A to expand the COMPANY A Data Center by adding two additional data halls, each containing 10,000 square feet of space and 1,200 kW of power. COMPANY A desires to expand its existing operations; however, there is no additional square footage available in the single building in which the COMPANY A Data Center is located.

Taxpayer and COMPANY A plan to expand the existing data center operations to include the additional data halls in one of the new structures on Taxpayer’s campus (i.e., the expansion space). The expansion space and the COMPANY A Data Center will be in separate buildings but will be functionally integrated to the exclusion of other tenants.

Ruling and Analysis

Our restatement of the rulings you requested is shown below, followed by our response and analysis.

Request: The expansion space to be leased by COMPANY A will be treated as part of the COMPANY A Data Center for purposes of Texas Tax Code Section 151.359.

Response: Tax Code Section 151.359(a)(2) states in relevant part that a data center means at least 100,000 square feet of space in a single building or portion of a single building. (Emphasis Added.)

The language of the statute is clear and unambiguously defines a data center as a single building. The plain and common meaning of the word single includes “unaccompanied by others” and “consisting of or having only one part, feature, or portion.” See Merriam-Webster Dictionary. The plain and common meaning of the word building is “a structure.” See Merriam-Webster Dictionary.

Although the expansion space will be physically connected to equipment located in the COMPANY A Data Center via conduits, wires, access control system, a common power source and service drive, the expansion space and the COMPANY A Data Center space do not constitute a “single building” as required by statute.

Construing Tax Code Section 151.359 to allow the expansion space to be considered part of the COMPANY A Data Center as requested is contrary to the statute and fails to give any meaning to the term “single.”

Request: Any qualified jobs and capital investments that are created or made with respect to the expansion space during the five-year period following the effective date of the COMPANY A Data Center’s certification as a qualifying data center will be attributed to the COMPANY A Data Center for purposes of satisfying the requirements of Texas Tax Code Section 151.359(d)(2).

Response: A qualifying job is defined Tax Code Section 151.359(a)(5) and in Rule 3.335(a)(7) and consists of multiple elements. One of those elements is the requirement that the qualifying job be located in the same county in Texas as the associated qualifying data center. See Tax Code Section 151.359(d)(2)(A) and Rule 3.335(a)(7)(A)(ii). As a qualifying job is not dependent on it being located or housed at the associated qualifying data center, any qualifying jobs that are created and located in the same county as the COMPANY A Data Center count towards satisfying the job creation requirement under Tax Code Section 151.359(d)(2).

Capital investment is defined in Rule 3.335(a)(1) and includes capital or fixed assets purchased for use in the operation of a qualifying data center. The qualifying data center is the facility certified as meeting each of the requirements, including the single building requirement, in subsection (d) of Rule 3.335. See Rule 3.335(a)(6).

Since the expansion space is not within the single building which was certified as the qualifying data center and does not become part of the qualifying data center, any capital investment related to the expansion space is not attributable to the COMPANY A Data Center for purposes of satisfying the capital investment requirement under Tax Code Section 151.359(d)(2).

Request: Any qualifying tangible personal property or electricity purchased for installation at, incorporation into, or use in the expansion space will be exempt from sales and use tax under Texas Tax Code Section 151.359(b).

Response: The exemption applies to tangible personal property purchased for installation at, incorporation into, or use in a qualifying data center. See Tax Code Section 151.359(b) and Rule 3.3365(b)(1). Since the expansion space is not within the single building which was certified as the qualifying data center and does not become part of the qualifying data center, any tangible personal property purchased for installation at, incorporation into, or use in the expansion space would not be attributable to the COMPANY A Data Center and is therefore, not exempt from sales and use tax under Tax Code Section 151.359(b).

Additionally, since the expansion space does not become part of the qualifying data center, electricity purchased for the expansion space is not exempt. If the expansion space and the existing qualifying data center space use an integrated electricity source, a predominant use study is required to differentiate between taxable and nontaxable uses of electricity from a single meter. See Rule 3.335(b)(1)(A) and Rule 3.295 relating to natural gas and electricity for more information on predominant use.

If you have questions about this private letter ruling, please submit an email to us through our website at https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling #142740061.

Sincerely,

Tax Policy Division