Tax Component of Total Cost of Ownership (Tax TCO) and The Impact of Policy on the Bottom Line

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1 Tax Component of Total Cost of Ownership (Tax TCO) and The Impact of Policy on the Bottom Line James W. Grice Lathrop & Gage, LLP

2 Traditional Drivers for Data Center Site Selection Fiber Educated Workforce Infrastructure Stable Climate Latency Research Institutes Geo-Stability Proximity to Users No Use Tax on Internet Right to Work Low Total Payroll Tax Incentives 2

3 Why Would States Want Incentives States are increasingly seeking to attract Data Centers because they are economic drivers which: Trigger a cluster effect of Data Centers and Digital Economy Prominence Stimulate research, development, innovation and commercialization in hardware, software and energy efficiency Create support industry jobs Create ancillary jobs and enterprises Create construction jobs Increase state and local tax revenue Are resilient to economic downturns 3

4 Tax Benefits: Evolution of the Data Center Marketplace Mid-Level User deployments expanding What is a Mid-Level User 500 kw 10MW deployments Recent survey in Dallas indicates that 60% of new deal flow consists of Mid-level Users Co-location Outsourcing is driving growth of these users Incentives should not be considered solely for the enterprise class user (i.e. Google and Microsoft) 4

5 Tax TCO Description of Tax TCO factors that may apply in any given jurisdiction: Annual Recurring Costs Sales and Use taxes on equipment, software, etc. Business personal property taxes on equipment, software, etc. Sales taxes on power Corporate income/receipts/franchise taxes Component of Amortized Costs Sales and Use taxes on building materials Real property taxes 5

6 Realignment of Tax TCO Policy to Accommodate Market Trends for the Mid-Level User Five States have no sales taxes Eleven States have no business personal property taxes Seventeen States have specific data center legislation Only two states, Arizona and Oregon, explicitly pass provide significant benefits to Middle Market User deployments In Arizona it is accomplished through specific data center legislation and a pro-business aggressive business personal property depreciation schedule In Oregon it is accomplished through a zero sales taxes and business personal property tax abatements 6

7 Mid-Level User Tax TCO Comparison. Arizona Oregon Iowa New Jersey Texas Minnesota Ohio New York North Carolina Washington Nevada Colorado Virginia Tennessee - 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Comparative analysis models the total costs of Business Personal Property Taxes along with Sales, Use and/or TPT Taxes applicable to a 1MW Tenant in each jurisdiction over 10 years after initial occupancy. Assumptions used to derive these number for this 1 MW tenant include the following: $10,000,000 Initial Equipment Installation with Server Refresh of $4,000,000 scheduled to occur once every 4 years. 7

8 Large User Tax TCO Comparison Ohio Iowa Arizona Washington Oregon Minnesota New Jersey North Carolina Nevada Texas Virginia New York Colorado Tennessee - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 Comparative analysis models the total costs of Business Personal Property Taxes along with Sales, Use and/or TPT Taxes applicable to a 10MW Tenant in each jurisdiction over 10 years after initial occupancy. Assumptions used to derive these number for this 10 MW tenant include the following: $100,000,000 Initial Equipment Installation with Server Refresh of $40,000,000 scheduled to occur once every 4 years. The model also assumes all incentive program requirements are met. 8

9 Problems with Existing Legislation While seventeen states have passed data center specific incentive packages, most are not targeting the Mid-Level User Common problems: Significant minimum investment threshold Significant job creation threshold Unbalanced payroll and/or salary requirements No direct applicability to tenants No exemption for power taxes Limited duration (don t provide for more than a single refresh) Non specific legislation: many states have non data center specific legislation that can provide significant benefits in the form of abatements and incentive, but they frequently require local discretionary approvals which can take time to secure (which may not be available during the site selection process) 9

10 Arizona Legislative Initiative Arizona targeted their legislation to benefit the Mid-Level User. Goal of the Arizona Initiative was to encourage CDC operation and expansion in Arizona. Accomplishes this goal by providing Sales Tax benefits in the form of Transaction Privilege Tax (TPT) and Use Tax Exemptions at the state, county and local levels. Benefits Data Center Owners, Operators and Qualified Co-location Tenants, that satisfy minimum requirements, on the purchases of CDC equipment. Specifically designed to maximize Data Center development in Arizona and to allow co-location owners and developers to pass that benefit to its qualifying tenants. 10

11 Arizona Legislative Initiative What is exempt: All computer server equipment, enabling software, chassis, networking equipment, switches, racks, cabling, trays and conduit, and other tangible personal property that is essential to the operations of a computer Data Center. Who is exempt Data Center Owners, Operators that demonstrate: $50 million minimum capital investment within 5 years of certification is required A.R.S (E)(1)(a); Tenants in a Certified Data Center (Co-Location): Minimum 500 kw/month for a period of 2 or more years Benefit Period: Tax relief equal to 10 full calendar years Tax relief equal to 20 full calendar years if qualified as a Sustainable Redevelopment Project 11

12 Cap and Trade The Next Evolution of Policy Affecting Data Center TCO Seen to be a first step in more widely accepted program Data Center Coalition is working to advocate for more favorable treatment Estimates vary WIDELY, but California Program is projected to increase power costs to data center users on an escalating scale by as much as 5% to 10% annually over the next 10 years. 12

13 Potential Impact of California Cap & Trade Program on Data Center Users 2,500,000 2,000,000 1,500,000 1,000, , This costs projection assumes that the annual increase in power rates will escalate 1% per year Hence the following rates schedule is the basis of this chart; Year 1.3% Year 2.4% Year 3.5% Year 4.6% Year 5.7% Year 6.8% Year 7.9% Year 8 10% Year 9 11% Year % Year % 13

14 Questions? James W. Grice Lathrop & Gage, LLP