The tightly targeted tax break would allow a 15-month sales tax exemption on the purchase and installation of computers and energy for new data centers in 32 rural counties. The measure passed the state Senate by a 39-4 vote on Tuesday, and cleared the House by a 91-2 vote last night.

The signing of the bill is likely to prompt a burst of activity in Quincy, where a number of data center builders have been awaiting the reinstatement of the tax incentive. These data center projects now have a 15-month window in which they can save money on equipment purchases.

The legislative initiative was backed by the Washington Needs Jobs coalition, which includes Microsoft, Yahoo, VMware, Sabey Corp. and Base Partners, along with the Washington Technology Industry Association and the town of Quincy.

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.”

The repeal of the tax benefits has slowed data center development in the state, which had seen a boom in mission-critical projects in Quincy and Wenatchee 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 center in Prineville.

The most intriguing question raised by the reinstatement of the tax breaks is whether Microsoft will build an additional facility in Quincy, where the company operates a 470,000 square foot data center. Microsoft initially planned to build two more huge data centers on its property in Quincy, but those plans were shelved when the tax break was revoked.

But the nature of the tax break, which only includes rural counties, has raised late objections from data center projects in other parts of Washington State. Seattle developer Benaroya Companies is building a $100 million data center project in Puyallup in Pierce County, which isn’t included in the legislation in its current form.

Benaroya said the company will have to rethink its plans if state government passes a tax break to data centers in another part of the state, saying it would hurt Benaroya’s efforts to compete for tenants. “I really only want a level playing field,” Benaroya’s Marc Nemirow told local media. “If we have to pay the sales tax, we don’t think it’s fair that someone else doesn’t.”

The tax break would allow a 15-month sales tax exemption on the purchase and installation of computers and energy for new data centers in 32 rural counties. Seven counties are not covered by the proposal.

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.”

The repeal of the tax benefits has slowed data center development in the state, which had seen a boom in mission-critical projects in Quincy and Wenatchee 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 center in Prineville.

The reinstatement of the tax break has been backed by the Washington Needs Jobs coalition, which 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.

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.

Taxes and data centers have become a hot-button issue in Washington State, where state officials ruled last year that data centers were no longer covered by a sales tax break for manufacturers. The downside of that move was highlighted today at an economic development in Quincy, the small town in Washington that has become the poster child for data center development.

Local officials made it clear that Quincy has experienced enormous benefits from the influx of data centers from Microsoft Corp., Yahoo, Intuit and Sabey Corp. Quincy Mayor Jim Hemberry said the city experienced an eight-fold increase in sales taxes between 2001 and 2007, and a tripling of property tax revenues from 2001 to 2009. “No question, those data centers had an impact,” Hemberry said at the event, which was covered by the Wenatchee World.

Windows Azure Flees From State
That spigot of revenue may be short-lived due to the state’s stance on data center tax incentives. Microsoft announced in August that it was migrating its Windows Azure cloud computing infrastructure from its data center in Quincy to another Microsoft facility in San Antonio. The reason: Microsoft’s unhappiness with tax policies in Washington state.  

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.

Quincy is a magnet for data centers because of its abundant supply of cheap, “green” hydro power generated by area dams. Others have continued to build in Quincy, including Sabey Corp. and Intuit. Yahoo has not indicated whether it will resume a planned expansion in Quincy, but has announced new data center projects in Nebraska and New York.

Interestingly, state and local officials said last week that Quincy has “done everything right” by investing in power, water and fiber-optic connectivity. “What we can see (about Quincy) is that this high-tech growth is real, that this area has become a real hub for strong economic activity,” said Lew McMurran, a vice president for the Washington Technology Industry Association.

Funding Local Improvements
Quincy is using its higher tax revenues to improve city services, Hemberry said, including imporvements to its library, senior center, museum and playground equipment. Tax revenues have also been earmarked for new equipment for the police and fire departments and emergency medical services.

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.  

That sentiment makes it unlikely for the measure to be resuscitated this year, as Washington legislators struggle to close a $2.6  billion gap. But data center developers remain interested in the cheap hydro power available from dams on the Columbia River, as evidenced by recent activity in Oregon, where Silicon Valley REIT Mission West is planning two projects, Amazon is said to be restarting construction on new facility in Boardman, and an unnamed ‘Company X’ is scouting sites in Prinveille. 

 RELATED STORIES:

• Microsoft Migrates Azure, Citing Tax Laws
• Microsoft, Yahoo Halt Quincy Projects
• Washington State’s Server Farm Tax Break Stalls
• Yahoo Rethinking Expansion in Quincy
• Quincy Plans Recycled Water for Microsoft

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The water recycling program is similar to one implemented in San Antonio, which Microsoft cited as a key factor in its choice of the city for a $500 million data center. It reflects a trend in which municipalities and data center operators are working to minimize the impact of these facilities on local water systems.

The Quincy project, which will treat up to 5 million gallons of water a day, will cost $9 million. The first phase is being built with a $4.5 million grant from the state, according to the Wenatchee World, which said the city has appealed to federal lawmakers for the rest of the money.

“Data centers use water to cool down,” Mayor Jim Hemberry told the paper. ”What we’ve decided to do is create this water-recycling facility that will take water from our domestic sewer … capture that and reuse it.”

Hemberry said Quincy saw its sales tax revenues jump from about $800,000 a year in 2006 to more than $4 million in both 2007 and 2008 during the data center construction boom.  Microsoft and the other data center companies were attracted to Quincy by the low cost of hydroelectric power from the Columbia River.   

The move to cloud computing is concentrating enormous computing power in mega-data centers containing hundreds of thousands of servers. All the heat from those servers is managed through cooling towers, where hot waste water from the data center is cooled, with the heat being removed through evaporation. Most of the water that remains is returned to the data center cooling system, while some is drained out of the system to remove any sediment, a process known as blowdown.

When this process is played out at mega-data center scale, the amount of water required for cooling can be enormous, sometimes exceeding the capacity of local utilities.

Sabey Corp. decided to build the campus in Quincy after its leasing success at its Intergate.Columbia in nearby East Wenatchee, where T-Mobile and VMware signed on as tenants within a year of groundbreaking. Sabey, a Seattle-based developer, began evaluating prospects for a data center in Quincy in 2007, and has listed the project on its web site for several months.

The new development continues the data center building boom in central Washington, where Microsoft, Yahoo, Ask.com and Intuit, have opened large data centers, drawn by the area’s low power rates and clean hydro-electric power from nearby dams on the Columbia River. Sabey notes that while the other projects are company-built and operated, Intergate.Sabey is “wholesale” data center space designed for companies who prefer to lease rather than own.

“It’s clear that the concept of leasing makes sense to major data center operators,” said John Ford, Director of Technology Real Estate for Sabey Corporation. “Our tenants design their interior modifications, while we provide them the economies of scale for shell and core. We also offer the infrastructure and mechanical system options to make their operations and budgets much more efficient.”

Like other data centers in Quincy, the Sabey facilities will benefit from a low carbon footprint due to its use of hydro power rather than coal-based electricity as well as the favorable climate for evaporative cooling to boost energy efficiency.

Sabey has submitted plans for a 50-megawatt data center campus similar to Intergate.Columbia, with two 186,000 square foot data centers, and two smaller buildings on a 40-acre site it purchased from the Port of Quincy.

Intergate.Quincy will be designed and constructed by the same team that completed Intergate.Columbia, including Sabey Construction, Inc., Callison Architecture, The McKinstry Company, Veca Electrical, Engineers Northwest and ESW Consultants.

The new data centers are already boosting tax revenues. At last week’s ceremony to mark the opening og the T-Mobile project, Douglas County Commissioner Ike Stanton said the county’s sales tax revenue jumped 280 percent in a single year, increasing from $220,000 in February 2008 to $838,000 in February 2009. “We refer to this in Douglas County as our own, federal stimulus package, because it’s been very good for Douglas County,” Stanton said, according to the Wenatchee World.

Sabey announced the East Wenatchee data center project in August 2006. The company’s project includes two data centers totaling approximately 380,000 square feet of space, along with a 75,000 square foot office building.

Sabey isn’t done building in the area, either. The Seattle-based company developer has bought land in Quincy for another data center project known as Intergate.Quincy. Additional development by Sabey would continue the influx of huge data centers in central Washington, including projects by Microsoft, Yahoo, Ask.com and Intuit.

Sabey has submitted plans for a 50-megawatt data center campus similar to Intergate.Columbia, with two 186,000 square foot data centers, and two smaller buildings on a 40-acre site it purchased from the Port of Quincy, according to an update on the project from the Columbia Basin Herald.   

Sabey Corporation has built and currently operates some of the largest data centers in the country, including Seattle’s 76-acre Intergate technology campus, one of the nation’s largest multi-tenant Internet complexes, along with other past operations in Los Angeles and Denver. It operates the Sabey Data Center, which includes a finished 120,000 square foot data center and 350,000 of expansion space.

Kevin Timmons, vice president of operations for Yahoo, told the Wenatchee World that the company has scouted land in Wenatchee for a data center “similar in size” to the company’s 140,000 square foot data center in Quincy. If the tax break materializes, Timmons said, Yahoo will continue with its plans to add a second phase of the Quincy data center as well as construct a new data center in Wenatchee. However, those plans are conditional. “Without a tax exemption it makes no sense,” Timmons said.

Legislation in Washington state that would have restored a tax break for data centers won’t be passed in 2008. The tax package was drafted after the state ruled that data centers were no longer covered by a state sales tax break for manufacturing enterprises, and thus must pay a 7.9 percent tax on data center construction and equipment.

Yahoo’s initial reaction was to threaten to move elsewhere. In a letter to legislators, Yahoo co-founder David Filo said the withdrawal of the sales tax incentive “swings the decision strongly in favor of freezing construction in Washington, and building instead in Oregon (which has no sales tax), as some of our competitors are already doing.”

Mark Urdahl, executive director of the Port of Chelan, told the World that he knew Timmons was looking at land in Chelan County for a data center but did not know if he had looked at land in Wenatchee. He said he was “not at liberty to discuss” sites Yahoo has looked at. Yahoo already has one data center in Wenatchee at the Confluence Technology Center.

Timmons noted that Yahoo has been lobbied by economic development officials in Oregon, North Carolina, Nebraska and other states. “Regardless of what happened in the past we want the state (Washington) to compete,” he said. “There are other communities in other states who want our business. The question is, does the state want to compete for that business or not? If Washington wants to compete for that business we would whole heartedly welcome that.”

Sales tax revenue is expected to recede as a number of data center projects are completed, reducing the volume of construction workers at local sites. Quincy is a small farm town that had 5,300 residents when it was selected for the Microsoft project in 2006. Yahoo, Ask.com, Intuit, Sabey Corp. and Base Partners have since announced projects in central Washington.

Legislation in Washington state that would have restored a tax break for data centers won’t be passed in 2008, leaving Microsoft (MSFT) and Yahoo (YHOO) to mull the future of their plans to continue building in the state. The tax package was drafted after the state ruled that data centers were no longer covered by a state sales tax break for manufacturing enterprises, and thus must pay a 7.9 percent tax on data center construction and equipment.

Curt Morris, president of the Quincy Port District. Curtis said even without the tax incentive, other companies are still looking to locate data centers in Quincy because it still offers cheap power and cheap land. He also said that the is beginning to diversify its economy, with several companies also considering non-data center local projects.