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Texas Taxes

State Sales Tax Exemption for Qualified Data Centers
Effective Sept. 1, 2013

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Overview

A new law provides a temporary exemption from state sales and use tax on certain items necessary and essential to the operation of a qualified data center. The exemption is for state sales tax only. Local sales taxes are due on purchases of these qualifying items.

Who Qualifies

A “qualified data center” is a facility in Texas that has been, or will be, specifically constructed or refurbished for use by a single occupant to house servers and related equipment for processing, storing or distributing data. Learn more.

An owner, operator and/or occupant of a data center may apply to the Comptroller for certification of the facility as a qualified data center and for registration as a qualifying owner, qualifying operator or qualifying occupant.

For certification, the applicant(s) must agree to:

  • make a capital investment of at least $200 million over a five-year period; and
  • create at least 20 permanent, full-time, qualifying jobs in the county where the data center is located.

Who Does Not Qualify

Data centers with agreements to limit the appraised value of property for property tax under Tax Code Chapter 313 will not qualify for this exemption.

Registration Number Needed

Upon certification of the data center, the Comptroller will issue a registration number to the data center. The Comptroller will also issue a registration number to each qualifying owner, qualifying operator and qualifying occupant who applies and establishes eligibility for the exemption.

Each qualifying owner, qualifying operator or qualifying occupant must provide this registration number, together with the data center’s registration number, on the data center exemption certificate it issues to retailers when making qualifying tax-exempt purchases for the data center.

Exemptions are Temporary

The state sales tax exemption is temporary. The exemption period for each qualifying data center begins on the date the data center is certified by the Comptroller and ends 10 or 15 years from the certification date, depending on the total amount of capital investment made in the qualified data center by the owner, operator and/or occupant. The exemption applies to qualified purchases made during the exemption period.

Application And Certification Requirements

Applicants must meet all of the following conditions on or after Sept. 1, 2013, for certification as a “qualifying data center”:

  1. The qualifying owner, operator, or occupant of the applicant data center must, (singly or jointly), commit to:
    • creating at least 20 qualifying jobs in the county in which the data center is located, not including jobs moved from one Texas county to another; and
    • making, or agreeing to make, a capital investment of at least $200 million in the applicant data center over a five-year period. The five-year period begins on the date the data center is certified by the Comptroller as a qualifying data center.

    Documentation outlining the plan to meet the capital investment and jobs requirements must be provided with the application. Information provided on and with the application is confidential.

  2. The applicant data center must be used, or have a pending contract for use, by a single qualifying occupant who has placed, or will place, tangible personal property used for the processing, storage, and distribution of data within the data center. The single qualifying occupant may not be a telecommunications provider or place tangible personal property that is used to deliver telecommunications services within the data center. In addition, the single qualifying occupant may not sublease any portion of the real or personal property within the qualifying data center.
  3. The applicant data center must:
    • be, or will be, located in Texas;
    • have, or will have, at least 100,000 square feet of space in a single building or portion of a single building located in Texas that is, or will be, used by a single qualifying occupant as a data center;
    • be, or will be, specifically constructed or refurbished for use primarily as a facility to house servers and related equipment and support staff for the processing, storage and distribution of data;
    • have, or will have, an uninterruptible power source; generator backup power; a sophisticated fire suppression and prevention system; and enhanced physical security that includes restricted access, video surveillance and electronic systems.
    • not be used primarily by a telecommunications provider to deliver telecommunications services; and
    • not be subject to an agreement limiting the appraised value of the data center’s property under Tax Code Chapter 313.

Failure to meet one or more of the certification requirements will result in the termination of the data center’s certification and the revocation of all related qualifying owner, qualifying operator and qualifying occupant registration numbers.

Each person who has a registration number revoked will be liable for state sales or use taxes, including penalty and interest from the date of purchase, on all items purchased tax-free under this program.

Texas Sales or Use Tax Permit or Direct Payment Permit Required

All qualifying owners, operators and occupants of a qualifying data center must hold a Texas Sales or Use Tax Permit or a Texas Direct Payment Permit and will be responsible for filing reports and paying any local use taxes that may be due on purchases of qualifying items. Data Center Certification applicants who do not have a permit must apply for a sales or use tax permit or direct payment permit when submitting the data center application.

Verification, Revocation and Important Dates

Effective Date of Sales Tax Exemption

A qualifying data center’s exemption begins on the date the data center is certified by the Comptroller. The sales tax exemption is temporary. A qualifying data center may qualify to retain this exemption for up to 15 years, depending on the amount of capital investment made by the owner, operator and occupant.

Five-Year Review: Capital Investment and Jobs Creation Verification

When an owner, operator and/or occupant of a facility applies for certification as a qualifying data center, they (either singly or jointly) commit to:

  • creating at least 20 permanent, full-time, qualifying jobs; and
  • making a capital investment of at least $200 million in the data center during its first five years.

The qualifying occupant, owner and/or operator of the qualifying data center must:

  • create the 20 qualifying jobs within five years from the effective date of the data center’s original certification by the Comptroller for the sales tax exemption; and
  • maintain the jobs for at least five years.

The parties are responsible for notifying the Comptroller once all 20 jobs have been created using a properly completed Qualifying Data Center Job Creation Report, Form 01-160.

The Comptroller will:

  • verify the job information annually until the five-year requirement for each job has been met.; and
  • audit each qualified data center at its five- year anniversary to verify the number of jobs created and the amount of capital investment actually made in the data center.

Revocation

If the qualifying owner, qualifying operator and qualifying occupant of a data center (either singly or jointly) do not fulfill the capital investment commitment and create at least 20 full-time, permanent, qualifying jobs within five years of the date the data center is certified, the data center’s certification will be terminated and all registration numbers associated with the data center will be revoked. Each person who has their registration number revoked is liable for the state sales or use tax, including penalty and interest from the date of purchase, on all tax-free purchases it made under the qualified data center exemption.

Certification Expiration Dates: Either 10 Years or 15 Years

The sales tax exemption for a qualified data center is temporary and may last for 10 or 15 years, depending on the amount of capital investment made.

10-year expiration date – A qualifying data center’s sales tax exemption expires 10 years from the date of certification by the Comptroller’s office if the qualifying owner, operator or occupant, (either singly or jointly) makes a capital investment of at least $200 million, but less than $250 million within the first five years after certification.

15-year expiration date – A qualifying data center’s sales tax exemption expires 15 years from the date of certification by the Comptroller if the qualifying owner, operator or occupant (either singly or jointly) makes a capital investment of at least $250 million within the first five years after certification.

Purchaser’s Recordkeeping

All qualified owners, operators and occupants of a qualified data center must keep complete records to document all tax-free purchases made under the qualifying data center exemption and to confirm payment of the local sales and use tax. The records must be retained until the data center’s certification expires. In the event of a revocation, all records must be retained until all assessments have been resolved.

Claiming the Exemption on Eligible Purchases: New Data Center Exemption Certificate and Registration Number

Upon certification of a qualifying data center, the Comptroller will issue a unique registration number to the data center and to each qualifying owner, operator or single occupant. If a party qualifies for multiple positions, such as a qualified owner who is also the qualified operator, the Comptroller will issue only one number.

A qualifying party claiming the data center exemption on a purchase must provide the registration number of the data center and its own registration number on the Qualifying Data Center Exemption Certificate (Form 01-929) it provides to the retailer. The Qualifying Data Center Exemption Certificate is the only acceptable documentation that a seller can accept for this exemption. Neither the generic exemption certificate (Form 01-339) nor the registration certification letter will be sufficient to claim the sales tax exemption for qualifying data centers.

The sales tax exemption for qualifying data centers applies only to the 6.25 percent state sales tax. The exemption certificate does not apply to local sales and use tax and the retailer must collect the applicable local sales and use tax.

Retailer’s Good Faith Acceptance of Exemption Certificate and Recordkeeping

The properly completed Data Center Exemption Certificate containing the registration numbers of the purchaser and its associated data center is the retailer’s documentation that a tax-exempt sale was made in good faith. The retailer is required to keep the exemption certificate and all other financial records relating to the exempt sale, including records to document the retailer’s collection of the local sales and use tax. The retailer must be able to match invoices of tax-free sales to the purchaser’s exemption certificate. This may be accomplished by the retailer entering the registration numbers for the purchaser and associated data center on each invoice.

A retailer is not required to accept an exemption certificate. If a retailer chooses not to accept an exemption certificate, the purchaser may request a refund of the tax paid from the Comptroller.

Retailers may verify the registration of a qualified data center and its associated parties [owner(s), operator(s) and/or single occupant] through the Comptroller’s online system.

A retailer is not required to verify a registration number before accepting a Qualifying Data Center Exemption Certificate (Form 01-929) from a purchaser at the time of sale.

Sales Tax Refunds

A retailer is required to charge sales tax if the person claiming a data center exemption does not provide the required Data Center Registration Numbers on the exemption certificate at the time of purchase.

A purchaser may request a refund of sales tax paid from the retailer. In determining how to handle refund requests, the retailer will need to know if the purchaser had a valid Data Center Registration Number at the time the item was purchased. To make this determination, retailers should use the Comptroller’s online verification system.

If the purchaser had a valid Data Center Registration Number at the time the purchase was made, the retailer may refund the sales tax or give the purchaser an Assignment of Right to Refund, as long as the purchaser provides the Data Center Registration Numbers on a properly completed Qualifying Data Center Exemption Certificate to the retailer when making that request.

If the purchaser did not have a valid Data Center Registration Number at the time the purchase was made, the retailer should not refund the sales tax or assign the right to refund to the purchaser.

A purchaser who did not have valid Data Center Registration Numbers on the date of purchase is not eligible for the exemption. Purchases made prior to the date a data center is certified by the Comptroller as a qualifying data center are not eligible for refund.

If the purchaser is a new owner, operator or occupant of an existing qualifying data center that has been certified by the Comptroller, the purchaser must apply for a registration number. The new applicant (purchaser) should include the registration number of the existing qualifying data center with the application. When the Comptroller processes the application, the effective date of the new applicant’s (purchaser’s) registration number will be made retroactive to the date the associated qualifying data center was certified by the Comptroller. The purchaser may submit the refund request to the Comptroller with the application for registration; or, return to the retailer for a refund after receiving the registration number.

Remember: Local Tax Is Due On Qualifying Tax Exempt Purchases

A qualifying owner, qualifying operator, or qualifying occupant does not owe the 6.25 percent state sales and use tax on qualifying taxable items that are purchased for installation, incorporation or use at a qualified data center, but local sales and use tax is due on such items.

Qualifying Items

The following items, if necessary and essential to the operation of a qualifying data center, are eligible for the data center exemption when purchased by a qualifying owner, qualifying operator or qualifying occupant:

  • electricity*;
  • an electrical system;
  • a cooling system;
  • an emergency generator;
  • hardware or a distributed mainframe computer or server;
  • a data storage device;
  • network connectivity equipment;
  • a rack, cabinet, and raised floor system;
  • a peripheral component or system;
  • software;
  • a mechanical, electrical or plumbing system that is necessary to operate any tangible personal property;
  • any other item of equipment or system necessary to operate any tangible personal property, including a fixture; and
  • a component part of any tangible personal property described above.

*Electricity: A predominant use study will be required to differentiate between taxable and nontaxable use of electricity from a single meter, unless the qualifying data center is a stand-alone facility of which the qualifying occupant is the sole inhabitant. For more information about predominant use studies, see Rule 3.295, Natural Gas and Electricity. The qualifying owner, qualifying operator, or qualifying occupant of a stand-alone qualifying data center is not required to perform a study and may, in lieu of tax, supply its utility provider with a properly completed Qualifying Data Center Exemption Certificate (Form 01-929).

Non-Qualifying Purchases

The following items do not qualify for exemption under this program:

  • office equipment or supplies;
  • maintenance or janitorial supplies or equipment;
  • equipment or supplies used primarily in sales activities or transportation activities;
  • tangible personal property on which the purchaser has received, or has a pending application for, a refund under Tax Code Section 151.429 (Tax Refund for Enterprise Projects);
  • tangible personal property not otherwise exempted under this statute that is incorporated into real estate or into an improvement of real estate;
  • tangible personal property that is rented or leased for a term of one year or less;
  • a taxable service that is performed on tangible personal property exempted by this section, Tax Code Section 151.3111 notwithstanding; or
  • activities that constitute nonresidential real property repair or remodeling.
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