The Texas Comptroller of Public Accounts (Comptroller) has adopted new rule §3.335, which provides for a temporary sales tax exemption for certain property used in a qualifying data center. This final rule became effective on Feb. 26, 2014.
The rule provides that tangible personal property purchased by a qualifying owner, qualifying operator, or qualifying occupant for installation at, incorporation into or use in a qualifying data center is exempt from Texas sales and use tax if such tangible personal property is necessary and essential to the operation of the qualifying data center. A qualified data center must be certified by the Comptroller to receive the sales and use tax exemption.
Qualifying data center
The Comptroller may certify a data center as qualifying for the sales and use tax exemption if, on or after Sept. 1, 2013, the qualifying owner, qualifying operator or qualifying occupant, jointly or independently, has agreed to:
- Create at least 20 qualifying jobs on or before the fifth anniversary of the certification; and
- Make a capital investment of at least $200 million in the data center over a five-year period beginning on the date the data center is certified.
In addition, in order be treated as a qualifying “data center” under the new rule, the data center must meet the following requirements for the life of the exemption:
- Be at least 100,000 square feet in a single building or a portion of a single building that is or will be located in Texas;
- Not be subject to an agreement limiting the appraised value of the property under the Texas Economic Development Act;
- Is or will be specifically constructed or refurbished for use primarily to house servers, related equipment and support staff for the processing, storage and distribution of data;
- Will be used by a single qualifying occupant for the processing, storage and distribution of data;
- Will not be used primarily by a telecommunications provider to house tangible personal property that is used to deliver telecommunications services; and
- Has or will have an uninterruptible power source, generator backup power, a sophisticated fire suppression and prevention system, and enhanced physical security system that includes restricted access, video surveillance, and electronic systems.
The tangible personal property that will be eligible for this exemption includes, among other specifically enumerated items: electricity, electrical systems, cooling systems, emergency generators, hardware or distributed mainframe computers or servers, data storage devices, network connectivity equipment, and software.
The exemption does not apply to: office equipment or supplies, maintenance or janitorial supplies or equipment, equipment or supplies used primarily in sales activities or transportation activities, tangible personal property that is rented or leased for a term of one year or less, certain taxable services, and property for which the purchaser has received or has pending an application for a tax refund for enterprise projects.
Duration of exemption
A qualifying data center’s exemption period must last for 10 or 15 years depending on the amount of capital investment made during the first five years of the exemption.
If the capital investment in the data center during the first five years of the exemption is at least $200 million but less than $250 million, then the exemption period expires 10 years after certification. If the capital investment in the data center during the first five years is at least $250 million, then the exemption period expires 15 years after certification.
Revocation of exemption
If the capital commitment and job creation requirements are not met within the first five years of the exemption or if the qualifying data center no longer meets the requirements for a data center during the exemption period, then the data center’s certification will be terminated and the exemption will be revoked. Upon the revocation of the exemption, the entity or entities that received the exemption will be liable for all Texas sales and use tax, including penalties and interest, from the date of the purchase, on all items purchased on a tax-free basis under the exemption (subject to the statute of limitations).