New sales tax exemption for data centers could be used soon

A so-far-unidentified company that already operates in Minnesota could decide in the next six or eight months to build or expand a large data center– basically, a warehouse of information-storing computers — in the state. That would make it the first to take advantage of a sizable sales tax exemption included in the state’s new tax law.

That’s the word from Bill Blazer, senior vice president at the Minnesota Chamber of Commerce, who says the chamber has been working with the company on the project for more than a year. The chamber played a role — as did the state Department of Employment and Economic Development (DEED) — in getting the exemption into the bill approved in the recent special session and signed by Gov. Mark Dayton.

The provision is aimed at enticing to Minnesota some of the large data centers that Google, Verizon, Yahoo and others build to meet their increasing demand for computer space. It exempts from Minnesota’s sales tax all purchases of equipment and electricity for any new or refurbished data center that involves at least 30,000 square feet of space and $50 million in investment. (Here’s the law, see Article 3, Section 7.)

State officials say the exemption could be worth some $12 million to a company over 20 years. “Minnesota is now in the game,” says Mark Lofthus at DEED. Lofthus said the state has had conversations with a number of potential data center builders. “We have maybe five or six (in discussions) that would qualify.”

Blazer wouldn’t be specific about the project the chamber has been discussing other than to say, “It’s a company that would expand here.”

So how did a tax exemption get into law when state leaders were looking under every rock for a few nickels to rub together? And isn’t this the kind of “tax expenditure” that has come under fire as a never-terminating loophole that saps potential state revenue without future legislative review?

The main answer to the first question is that proponents see it as a tool to encourage economic development and create jobs. Lofthus said large data centers employ 100 or more well-paid employees, and he said Iowa, Nebraska and other states have been successful at attracting them with tax incentives.

DEED drafted the legislation last fall, and Blazer said the chamber had been working on the idea, too, although he said the conversation slowed down when Dayton was elected.

Blazer described Dayton’s staff as raising a question over the wisdom of creating a tax exemption in a time of projected budget shortfalls.

The House Tax Committee held a hearing on a bill for the exemption on May 4, but committee chairman, Rep. Greg Davids, R-Preston, said he didn’t think it was going anywhere this year. He said he was pleasantly surprised when the Department of Revenue brought it up in the final discussions before the rushed special session last month.

“I thank the governor for bringing it forward,” he said.

That’s not the recollection of Matt Massman, assistant commissioner of the Department of Revenue, who says he’s pretty sure Republican legislative leaders brought it up in the final discussions.

In any case, Lofthus, who testified at the House hearing, came in and talked to negotiators about it, Davids said, so DEED clearly thought it was important.

Earlier, at the May 4 hearing, several DFL representatives expressed reservations about implementing the exemption during tough times. You can find a link to listen to the hearing on this page.

Rep. Lyndon Carlson, DFL-Crystal, one of those raising questions at the committee hearing, said recently, “Even if something has merit, was that a good time to do it?”

Massman acknowledged this week that “clearly there’s going to be an impact on the state budget.”

In the end, the provision was altered so it doesn’t take effect until next year, and a company has to pay the tax and then seek a refund that wouldn’t be paid until 2013 at the earliest. So the current budget isn’t affected.

As for the “tax expenditure” question, the chamber’s Blazer objects. In his view, a tax expenditure is an exception to a widely accepted definition of the tax base. He thinks the sales tax should properly be levied at the point of consumer sale, not when a business buys electricity or equipment. (Manufacturers have been exempt from sales tax on equipment for some time, as an incentive for investment.)

Not everybody agrees with that view, and in fact, businesses in Minnesota do pay lots of sales taxes on transactions that are not at the point of consumption.

(According to an Associated Press story last January, the Legislature could have solved its entire budget gap by eliminating all 83 sales tax exemptions on food, clothing and other items.)

This normally isn’t a topic Ground Level would delve into, but we’ve written a lot about extension of broadband availability in Minnesota, and the availability of fast Internet access obviously is a requirement for any data center operations. In Lake County, in fact, where the county was awarded stimulus money for a fiber project, officials have tried to entice Verizon to take advantage of high speed and cold weather.

This incentive will be a good one to keep tabs on to see whether data centers start expanding in Minnesota and how many jobs they create. Even though Blazer indicates there’s a company waiting in the wings, Massman said no specific companies came up in the final discussions over the tax bill. Davids says he’s eager to know who might take advantage. “I hope we’ll find out quite soon.”