Microsoft Migrates Azure, Citing Tax Laws

Microsoft is shifting its Windows Azure platform from Quincy, Washington to the company's data center in San Antonio, pictured above.

Microsoft is shifting its Windows Azure platform from Quincy, Washington to the company's data center in San Antonio, pictured above.

Microsoft is migrating its Windows Azure cloud computing infrastructure from its data center in Quincy, Washington to another Microsoft facility in San Antonio, Texas. The reason: Microsoft’s unhappiness with tax policies in Washington state, which ruled last year that data centers were no longer covered by a sales tax break for manufacturers.

Without the tax break, Microsoft (MSFT) would pay a 7.9 percent tax on all new data center equipment. Since Windows Azure will require thousands of additional servers once it launches, those costs would add up quickly.

“Due to a change in local tax laws, we’ve decided to migrate Windows Azure applications out of our northwest data center prior to our commercial launch this November,” Microsoft say on its Windows Azure blog (link via OakLeaf Systems). ” This means that all applications and storage accounts in the “USA – Northwest” region will need to move to another region in the next few months, or they will be deleted.” Azure applications will shift to the USA – Southwest region, which is housed in Microsoft’s 470,000 square foot San Antonio data center, which opened last September. 

The move underscores how the economics of data center site location can change quickly – and how huge companies are able to rapidly shift operations to chase the lowest operating costs.       

State: Data Centers Not Manufacturers

The tax controversy in Washington State erupted in December 2007 when attorney general Rob McKenna ruled that data centers were no longer covered by a state sales tax break for manufacturing enterprises because they “do not produce a product which is sold to the companies’ customers.”

Microsoft and Yahoo halted construction on their multi-facility data center campuses in Quincy while state legislators debated whether to reinstate the tax break, which was Microsoft and Yahoo relied upon in their decisions to build their Quincy projects. The legislative effort later stalled after local media characterized the bill as a $1 billion tax break for high-tech giants.   

A Cost-Driven Data Center Cluster
Quincy is a magnet for data centers because of its abundant supply of cheap, “green” hydro power generated by area dams. Microsoft pays just 1.9 cents per kilowatt hour for its power in Quincy, compared to rates of 12 cents an hour in Silicon Valley and even higher in the New York market., Intuit, Sabey Corp. and Base Partners have also built or announced data center projects in central Washington.

In rejecting calls to reinstate the tax breaks, legislators appeared to be betting that Microsoft’s threats to shift operations to other states was a negotiating ploy, rather than an action plan. If so, Microsoft has called their bluff.

Some newer Azure accounts are already housed in San Antonio. The WIndows Azure team is providing a tool to help Asure developers determine which data center is hosting their site, and will be releasing a tool to help clients migrate applications to San Antonio. 


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About the Author

Rich Miller is the founder and editor at large of Data Center Knowledge, and has been reporting on the data center sector since 2000. He has tracked the growing impact of high-density computing on the power and cooling of data centers, and the resulting push for improved energy efficiency in these facilities.

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  1. Rich: I think you mean "1.9 cents per kilowatt-hour" rather than "1.9 centers per megawatt hour." As written, it would be worth paying the additional sales tax to get the dirt-cheap power. --rj

  2. Roger: Yes, indeed. I've fixed this. The power in Quincy may be cheap, but it's not that cheap. :)

  3. Johnny Mnemonic

    And since Microsoft is going to run Operations for Yahoo, the Yahoo DC in Quincy is almost certainly not going to be expanded, either. It would be a bad time to be a spec home builder in Quincy. They're going to wind up with a lot 3k sq/ft very pretty homes with no one to sell them to. Washington State were fools to think that Microsoft wouldn't just shift operations to save 8%. Apparently the legislators aren't up to speed with the ability of internet companies to disassociate from meat space concerns. It's first about the price of power, second about the latency to your customers, third about the price of water, fourth about the price of land. The "worker environment" or whatever Washington would like to think they have over states like Texas is almost irrelevant.

  4. I find it curious that Microsoft is making Azure developers migrate their own accounts. I would think this would be automated. Part of what the cloud is supposed to offer is not having to worry about where your your data is kept/where the code is run.

  5. @Johnny, I believe Microsoft is only taken over search operations for Yahoo! Yahoo! mail, in-house and user-generated content, etc., still requires a lotta bandwidth. @Jonathan, Moving the main project account to another data center is likely to be an infrequent operation but I, too, was surprised to hear that I would need to move my nine hosted projects from "USA -Northwest" to "USA -Southwest" manually. The Azure team is redying a deployment/management API, but it might not be done in time. --rj

  6. TD

    Mr. Mnemonic, Fine with me if Microsoft does not expand it's data centers here. Data centers do not generate a lot of local jobs and hence do not really contribute to the local economy, but they do suck up a lot of power driving up energy costs for the rest of us. If Microsoft thinks they can get cheaper power, which is one of the larger costs of a data center, in Texas where in the summer the daytime temperature is routinely above 105F then let them. BTW - Rob McKenna is a Republican. You've been betrayed!

  7. Bob L

    If Whirlpool moves Maytag to Mexico to get cheaper labor, then Microsoft can move their cloud to TX. Now think containers…and how quickly they can be moved.

  8. I cannot believe Washington state on this. Texas just passed some great legislation before the end of their last session giving Tax breaks to data centers, Virginia too. If Texas (ERCOT) adds to the capacity of the grid to get the wind generation to load centers they will be the new Black as far as data center locations go...

  9. In the early 90's I worked at Fidelity in Boston and the MA legislature was looking at taxing services (such as investment and tax preparation services). We began plans to move data center operations out of the Bay State down to Dallas TX. Back then Fidelity owned/leased 17 buildings in downtown Boston and the giant sucking sound would have reverberated for years. The proposed legislation was quietly removed ;)

  10. The interesting aspect of this, other than the OpEx cost arguments, is the position that Cloud services “do not produce a product which is sold to the companies’ customers.” Define 'product'. I disagree with A.G. The services are a product and in fact are, or will be, superiour to on-premise capabilities. When you consider integrating these services into your IT strategy they should be evaluated as products. The upfront strategic assessment of these products is critical to business continuity, capacity and performance. Did I say 'products'?

  11. Cloud Preacher

    Another example of what happens when Corporations are taxed to death and they wind up moving jobs and revenue elsewhere. I always hear Liberal politicians exclaiming that the large corporations are betraying the middle and lower class by getting away with tax breaks, keeping all the money etc... Who is really hurting the economy in certain areas? Local goverments who attempt to generate more revenue by taxing business and driving them to relocate in another state or country or businesses who are just making the right decisions to stay profitable and continue to add jobs?

  12. Microsoft is awesome. They are great at everthing they make.