Washington State ‘Server Farm’ Tax Break Fails

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. Last month Microsoft and Yahoo halted construction on their multi-facility data center campuses in Quincy, Washington while state legislators debated the tax bill.

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. Gov. Chris Gregoire requested an exemption in Senate Bill 6666, which would restore the exemption for data centers. The bill was caught up in tax politics, with media terming it a $1 billion tax break for high-tech giants.

“To be honest, we just didn’t have time.” Rep. Mike Armstrong, R-Wenatchee told local media. “We’ll see what we can do for the next session,” which begins in January 2009.

Ask.com and the Quincy Power Advantage

In our recent discussion of the uncertain future of Washington state’s tax incentives for data centers, we wondered whether the tax breaks were big enough to bust the economic model that has drawn so many companies to build data centers in central Washington. The primary lure of Quincy and nearby towns is cheap hydro power from the Columbia River, which offers a significant savings compared to many traditional data center hubs.

Greg Fennewald, senior director of data center strategy for Ask.com, discussed the economics of power at last week’s meeting of the Grant County Economic Development Council. Fennewald spoke about why his company decided to locate in Moses Lake, Washington, where it opened a new data center in December. The savings on electricity, he said, are “quite significant.”

Microsoft, Yahoo Halt Quincy Projects

Microsoft and Yahoo have halted construction on their multi-facility data center campuses in Quincy, Washington while state legislators debate a tax break for data center projects, according to local media reports. Late last year Washington State attorney general Rob McKenna 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. McKenna ruled that the data centers “do not produce a product which is sold to the companies’ customers” and thus aren’t manufacturers.

A story in today’s Seattle Post-Intelligencer story, titled “High-tech giants seeking massive tax break,” updates the story and takes a critical look at the tax breaks and the business case for data centers in eastern Washington.

Gov. Chris Gregoire requested an exemption in Senate Bill 6666, which would restore the exemption for data centers. In the meantime, the Internet titans have shelved plans for additional investment in Quincy, a small farm town that had 5,300 residents when it was selected for the Microsoft project. Yahoo, Ask.com, Intuit, Sabey Corp. and Base Partners have since announced projects in central Washington. Real estate prices have surged in Quincy, which the Washington post dubbed “the Klondike of the Internet era.”

But perhaps not without tax breaks. Yahoo first suggested that it was rethinking the future of its Quincy data center during the project’s opening in December. A blog post later emphasized Yahoo’s commitment to the new site. But Yahoo co-founder David Filo was more direct in a letter to a state legislator.

“An unexpected requirement to pay sales tax will destroy the competitive advantage that led Yahoo to select Quincy as the location for our latest facility, and in fact 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,” Filo said in the letter to Senate Ways and Means Committee Chairwoman Margarita Prentice.

T-Mobile to Consolidate at Wenatchee Site

Executives of T-Mobile say they will consolidate their entire national data center network into a new 200,000 square foot facility being built by Sabey Corp. in central Washington state. The wireless company launched construction Thursday on the data center in East Wenatchee, Washington, which will be part of Sabey’s Intergate.Columbia multi-tenant data center complex.

“When we grow, we will grow here,” said T-Mobile’s Senior Vice President Robert Strickland, who added that he hopes to “begin operating at least a part of the new center by Thanksgiving.” That would equal the 11 months it took Microsoft to open its facility in nearby Quincy, Washington.

Huge T-Mobile Lease at New Sabey Project

T-Mobile will lease 200,000 square feet of space at Intergate.Columbia, the Sabey Corp. data center project in East Wenatchee, Washington, according to local media. T-Mobile is the first tenant announced for the Sabey facility, which is projected to have a project cost of more than $100 million.

The primary T-Mobile’ data center in Bothell, Washington was flooded last month when torrential rains hit the Seattle area. The outage knocked the T-mobile website offline and disrupted new customer activations nationwide. Bothell is more vulnerable to flooding than other data center hubs in the Seattle area. East Wenatchee is in an area of central Washington that has seen a boom in data centers since 2006, when Microsoft announced a major new facility in Quincy to support its new online services.

Yahoo Rethinking Expansion in Quincy

Yahoo is rethinking additional expansion in Quincy, the new data center hub in central Washington. On Dec, 3 Yahoo held a grand opening for its new 140,000 square foot facility in Quincy, which has attracted multiple data center projects with its abundant supply of cheap power from dams on the Columbia River. As the company showed off its new facility, Yahoo executives warned that its plans for additional expansion at the site are unclear after Washington State attorney general Rob McKenna ruled that data centers were not covered by a state tax break.

McKenna ruled that data centers don’t qualify as manufacturing enterprises, and thus must pay a 7.9 percent tax on data center construction and equipment. McKenna found that data centers “do not produce a product which is sold to the companies’ customers or used by the Internet companies as consumers or in manufacturing articles, substances or commodities,” the attorney general said in the letter to State Sen. Janea Holmquist.

Still More Companies Eyeing Quincy

It looks like the data center boom in central Washington isn’t likely to slow down anytime soon. Just a day after Base Partners announced plans for a 400,000 square foot data center campus in Quincy, officials at the Port of Quincy told the Seattle Times that Sabey Corp. is purchasing 39 acres at the port. We reported about Sabey’s interest in the port of Quincy back in April.

Local economic development officials are indicating that there may be even more data center projects in the pipeline for the area. Terry Brewer, executive director of the Grant County Economic Development Council, told the Times that his organization has “responded to requests for information from more than a dozen clients and consultants representing clients who are researching sites for data centers.”

Central Washington already has secured projects from Microsoft, Yahoo, Sabey Corp., Intuit and Ask.com which will add a total of nearly 2 million square feet of data center space in the area. The companies are lured by cheap hydroelectric power from the Columbia River, which is priced as low as 1.8 cents per kilowatt hour.

More Data Centers Coming to Quincy

There will be more data centers coming to Quincy, Washington, the small town whose cheap electricity is transforming it into a major hub in the Internet economy.

Base Partners Inc., a San-Francisco-based developer of data center properties, has acquired a 70-acre development site in Quincy, and plans to build up to 400,000 square feet of data centers for corporate users. The company plans a phased build-to-suit project of four data center facilities ranging from 50,000 to 200,000 square feet. Base Partners will offer tenants the option of using the latest energy efficiency technologies for their facilities.

“The abundant availability of low-cost hydroelectric power and fiber-optic lines as well as the region’s stable geological setting clearly make Quincy a prime data center location,” said Base Partners’ Aaron Wright. “Power costs here are the lowest in the nation, equaling 1.8 cents per kilowatt hour, as compared to 12 cents per kilowatt hour in San Francisco and 6.2 cents per kilowatt hour on average in the U.S., resulting in significant savings to end users.”

Ask.com Confirms Moses Lake Facility

Search engine Ask.com, a unit of IAC (IACI), yesterday confirmed earlier reports that it will build a data center at the TITAN complex in Moses Lake, Washington. The project adds to the growing list of data centers in central Washington state, which already features data centers from Microsoft, Yahoo, Sabey Corp. and Intuit.

Unfortunately, the press release from Ask.com doesn’t add much to what was already public about the project. The company says the new facility will be “eco-friendly” and provide additional computing power its new Ask3D feature, which combines images, video and music as well as links on a single results page.