Virginia's Tax Exemption for Data Centers Costs Big, But  is Paying Off Bigger

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This article first appeared in the Washington Business Journal, December 28, 2017. Read the original here.

Virginia's data center personal property tax abatement cost the state more than $65 million in fiscal year 2017, but one local official says the incentive pays big dividends. The commonwealth was willing to forego more than $60 million in sales taxes last fiscal year to grow its data center sector.

Loudoun County's ascendance as a worldwide data center hub didn’t happen magically, or even organically. It got a big boost from the state, in the form of tax incentives. Virginia's recently released Comprehensive Annual Financial Report for fiscal year 2017 details, for the first time, just how much revenue the commonwealth forgoes as a result of its retail sales and use tax data center exemption, an 8-year-old incentive program. In fiscal 2017 alone, the state gave up $65.2 million in sales tax revenue in order to reap the benefits of data centers — that is, big investments in capital and technology and high-paying jobs without the corresponding increase in school kids, traffic or public safety demands.

No jurisdiction in Virginia has benefited from that exemption as much as Loudoun, which is home to more than 75 operating data centers with many more under construction — from Sterling to Ashburn and beyond — and more to come, including several projects from Google. Buddy Rizer, Loudoun County’s economic development director, said the county’s data center boom might be a direct result of the state abatement.

“The data center sales tax exemption is a state incentive which has universally been considered one of the most smart and important incentives driving today’s economy,” Rizer said in an email. “Over the past decade, Virginia has become one of the most important technology locations in the world, and I don’t think it would have happened without the sales tax incentive.”

Virginia's 2017 annual financial report includes the sales tax figure because the state just implemented the Governmental Accounting Standards Board Statement No. 77, which generally calls for a breakdown of tax abatement programs. The specificity of that data varies from report to report, state to state, locality to locality.

The commonwealth, for example, provided $6.6 million in tax abatements in 2017 through its Motion Picture Production Tax Credit, $164,823 through the Virginia Enterprise Zone Program and $100,500 through the Entitlement to Tax Revenues from Tourism Projects.

The statewide data center tax break exempts computer equipment, enabling software and other enabling hardware from the sales and use tax — 6 percent in Northern Virginia and Hampton Roads, and 5.3 percent across the rest of the state. It applies to data center projects that result in a new capital investment of at least $150 million and create at least 50 new jobs that pay at least 1.5 times the home locality's prevailing average wage.

As of July 1, 2012, the exemption was extended to purchases and leases made by data center tenants. Loudoun is home to roughly 3,000 such tenants.

That $65.2 million figure for a single year statewide is a big number, Rizer said, but Loudoun this year alone will receive more than $180 million in local tax revenue from the data center sector. More than 85 percent of that local tax revenue, he said, is from the personal property tax on data center equipment, with a much smaller portion coming from real property taxes.

Loudoun's personal property tax on computer equipment is $4.20 per $100 of value, higher than neighboring Prince William County, among other data center competitors outside of Virginia. The local tax is expected to generate $174 million in 2018, up from $151.3 million in 2017.

As Loudoun, Rizer said, "has never given any local financial incentives to data centers" (it broached the idea of a tax cut earlier this year, but opted not to move forward), it makes the state abatement all that more important.

"That’s why I consider the state sales tax exemption to be as much about business retention as it is about business attraction," Rizer said.

Michael Neibauer
Associate Editor
Washington Business Journal