Washington State Revisits Data Center Tax Break

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An aerial view of Quincy, Washington showing the cluster of major data centers, including a visualization of a planned site for Sabey Corp. and existing sites for Microsoft, Yahoo and Intuit.  A coalition of data center companies is seeking to reinstate tax breaks in Washington state that helped develop the Quincy cluster. (Image: Sabey Corp.).

An aerial view of Quincy, Washington showing major data centers, including a visualization of a planned site for Sabey Corp. A coalition is seeking to reinstate tax breaks that helped develop the Quincy cluster. (Image: Sabey Corp.).

A coalition of data center companies and economic development groups is seeking to reinstate tax breaks that attracted major data center projects to the state, and express optimism that the effort will have improved legislative support.

The group, Washington Needs Jobs, last week hailed the introduction of two bills in the Washington Legislature (SB 6789 and HB 3147) that would allow a 15-month sales tax exemption on the purchase and installation of computers and energy for new data centers in rural counties.

The repeal of the tax benefits in November 2007 has slowed data center development in the state, which had seen a boom in mission-critical projects in 2006 and 2007. Microsoft cited the tax issue in its decision to migrate its Windows Azure cloud computing service out of Washington state. Meanwhile, rival Oregon is attracting major new projects, including a $188 million Facebook data centerin Prineville.   

The Washington Needs Jobs coalition includes Microsoft, Yahoo, VMware, Sabey Corp. and Base Partners – which all have data center projects in the state – along with the Washington Technology Industry Association and the town of Quincy, Wash. The group says the impact of the tax decision on data center development is now clear.   

“We are relatively optimistic about the bills’ opportunity to pass,” said Jim Kneeland of Washington Needs Jobs. “We’ve got a broader coalition than we have in the past. House leadership is on the bill this time, which is a very positive point. It has been recommended by the Department of Revenue, which recognizes that this is a potential net gain to government, rather than a loss.”

The revenue impact of the bills is critical because state legislators must address a budget shortfall of more than $2 billion. 

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.

“The data centers have provided a significant boost to our economy while other rural areas have struggled,” said Curt Morris, President of the Port of Quincy, who said Quincy’s property-tax rate declined by 10 percent because of the broader tax base created by data centers from Microsoft and Yahoo.

“Washington needs to become competitive again for these facilities,” said Dean Allen, CEO of McKinstry, the Seattle mechanical contracting firm that specializes in green facility design. 

“This legislation creates a window of opportunity to stimulate the economy in the short term with hundreds of badly needed construction jobs in Eastern Washington and, by restarting data center development in this state, to generate long-term high tech jobs and spur additional technology investment,” said Rep. Timm Ormsby, D-Spokane, the lead sponsor of the House version of the bill.

Kneeland said the state legislative session will last two months, and said the Washington Needs Jobs coalition would provide updates on the bills’ progress on Twitter and Facebook.

About the Author

Rich Miller is the founder and editor-in-chief 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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9 Comments

  1. nate

    As someone who lives in Bellevue, WA I say let them go to other places. Data centers don't create enough jobs to justify those big tax breaks.

  2. TD

    I agree with Nate. Plus the data centers are huge power hogs, driving up utility costs for everyone which outweighs the very small number of jobs they create. What is with the so called "capitalists" today? Can't they stand on their own two feet without government and taxpayer support? Does profitable MS really need a government bailout?

  3. jcafazzo

    Washington is falling behind when it comes to its position as a high-tech leader and as a center for innovative business. Just look at Boeing's departure on the second 787 line. But even more important, a good portion of our state's residents don't have jobs to feed their families. Our unemployment rate is the highest it's been in 25 years. Each of these data centers bring hundreds of construction jobs, as well as some permanent jobs to operate the facility. And rural towns like Quincy are improving schools, playgrounds and fire and police services from the tax revenue they are receiving from the centers. Our state, our workers and our rural areas need these data centers, and this legislation looks like it will bring them back.

  4. mytwocents

    If you follow this blog regularly you've noticed that all recent major data center construction has gone to places offering incentives. Places like Texas, the Carolinas, Orgeon. Relative proximity to world class, efficient data centers will encourage tech businesses to locate and remain in Washington.

  5. The tax exemption is NOT a bailout, but an incentive. It was never asked for by business but granted by the State to create jobs. The purpose of the tax exemption is to present an incentive for businesses to build facilities in rural areas. Building a manufacturing facility is a very expensive process, involving huge amounts of capital. Constructing a factory or a datacenter costs between $700 to $3000 per square foot, compared to $100 per square foot for the average office building. Reducing that cost by any percentage is an incentive and the state of Washington created a package which allows for a tax exemption for major capital equipment purchases, such as conveyors for a factory, or backup battery systems for a datacenter. Mr. McKenna's short-sighted declaration misses the point that datacenters are the manufacturing facilities of the Internet Economy. Yes, their output is bits rather than atoms, but they are just as critical to the future of business as the assembly lines of the early 20th century were to their locations. Their construction provides many jobs, and their operations provide higher wage jobs that are usually found in rural areas. Washington has to face two very important facts: 1. The traditional industries of rural ares (Timber, Agriculture, and Fishing) are mostly gone and will never come back. 2. Washington is uniquely positioned to become THE place for the Internet Datacenter industry to locate. We have the best combination of climate and utility rates. By making it more expensive to build facilities here, the business WILL go to Oregon, Idaho, Iowa, North Carolina, etc. (in fact it already is!) So our legislature can do nothing and watch these other states win the business, or it can fix the error of 2007 and help bring the industry of the future to rural counties where there are no jobs today. The choice seems simple to me.

  6. nate

    I agree with Chuck, let them go! Data center businesses are quickly becoming a race to the bottom. Especially with the creation of container-based data centers that can be picked up and moved in a matter of weeks or months. If we want to provide tax breaks to businesses then lets do it, give everyone an equal break, don't target a specific industry, or if you do at least target one that gets more jobs. A lot of these tax breaks seem targeted at industries or organizations that are large enough to take advantage of it, leaving the smaller businesses out of luck. Just looking at a recent data center build out plan from Apple on this site in North Carolina from July 500,000 square feet, and only 50 full time employees, pretty sad that they got incentives for that.

  7. Nate, my view is that we should NOT let them go. The reality of the datacenter business is that the vast majority of them are NOT being run by huge corporations. To date however they are the ones who have been the first movers into rural communities. Be assured though that where the big players go, the medium and small players will soon follow. Seattle is currently home to many dozens of small—medium sized datacenters. These facilities usually employ proportionally more people than large corporate facilities do.Given the long-term operational savings east of the Cascades I imagine that many of these companies are interested in expansion outside of Seattle. I know I am. But if my options in Oregon are better, why not go there instead? McKenna may have thought he was striking down a law favoring big business, but in reality he was striking down a whole economic sector populated by small and medium-sized business as well. Ironically this is the one economic sector that has actually been thriving over the past several years (after being pummeled nearly to death in 2000-2003), and has the potential to become a major factor in the economy of the future. Washington had a 5-year lead on the rest of the country to nurture and develop this infant industry, but instead shunned it and handed it off to Oregon and other states.