Document Number
10-121
Tax Type
Retail Sales and Use Tax
Description
Application of tax to equipment purchased and leased for use in a data center
Topic
Data Center Exemption
New Procedure(s)
Tangible Personal Property
Date Issued
06-29-2010

June 29, 2010




Re: Ruling Request: Retail Sales and Use Tax

Dear *****:

This is in response to your request for a ruling on the application of the Retail Sales and Use Tax to equipment purchased and leased by ***** (the "Taxpayer") for use in a data center.

FACTS


The Taxpayer owns a data center that is located in a Virginia locality and has entered into a Memorandum of Understanding with Virginia Economic Development Partnership Authority ("VEDP") **********. The Memorandum of Understanding provides that the taxpayer expects to make capital investments of at least $150 million and expects to create at least 50 new jobs, paying at least one and one-half times the prevailing average wage, in conjunction with the development or expansion and operation of the data center. The Memorandum of Understanding also provides that the taxpayer expects to invest at least $150 million in the purchase or lease of certain computer assets.

The Taxpayer provided the Department of Taxation ("TAX") with a list of various equipment and tangible personal property that it has purchased or will purchase for use in its data center and requests a ruling regarding the application of the Retail Sales and
Use Tax.

DETERMINATION


New Data Center Exemption

Effective July 1, 2010, House Bill 302 and Senate Bill 130 (2010 Acts of Assembly, Chapters 826 and 784) amend Va. Code § 58.1-609.3 to provide a Retail Sales and Use Tax exemption:
    • 18. Beginning July 1, 2010, and ending June 30, 2020, computer equipment or enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware, including chillers and backup generators used or to be used in the operation of the equipment exempted in this paragraph, provided that such computer equipment or enabling software is purchased or leased for use in a data center that (i) is located in a Virginia locality, (ii) results in a new capital investment on or alter January 1, 2009, of at least $150 million, and (iii) results in the creation on or after July 1, 2009, of at least 50 new jobs associated with the operation or maintenance of the data center provided that such jobs pay at least one and one-half times the prevailing average wage in that locality. The requirement of at least 50 new jobs is reduced to 25 new jobs if the data center is located in a locality that has an unemployment rate for the preceding year of at least 150 percent of the average statewide unemployment rate for such year as determined by the Virginia Economic Development Partnership or is located in an enterprise zone. Prior to claiming such exemption, any qualifying person claiming the exemption must enter into a memorandum of understanding with the Virginia Economic Development Partnership Authority that at a minimum provides the details for determining the amount of capital investment made and the number of new jobs created, the timeline for achieving the capital investment and new job goals, the repayment obligations should those goals not be achieved, and any conditions under which repayment by the qualifying person claiming the exemption may be required. In addition, the exemption shall apply to any such computer equipment or enabling software purchased or leased to upgrade, supplement, or replace computer equipment or enabling software purchased or leased in the initial investment. The exemption shall not apply to any other computer software otherwise taxable under Chapter 6 of Title 58.1 that is sold or leased separately from the computer equipment, nor shall it apply to general building improvements or other fixtures.
    • The enactment clauses of House Bill 302 and Senate Bill 130 provide:
    • That after July 1, 2010, any person who meets the requirements for exemption set forth in subdivision 18 of § 58.1-609.3 shall be eligible for a grant in an amount equal to any tax imposed and paid by such person pursuant to Chapter 6 of Title 58.1 of the Code of Virginia on purchases that would, except for the date of purchase, otherwise qualify for the exemption under subdivision 18 of § 58.1­609.3 made on or after July 1, 2009, and before July 1, 2010.

Item 96(L) of House Bill 30, the Appropriations Act for the 2010-12 Biennium (Acts of Assembly 2010, Chapter 874), provides that "up to $3,420,000 the first year from the general fund shall be paid for a grant for the reimbursement of sales and use taxes paid by an eligible entity for purchase of certain computer equipment and enabling hardware pursuant to the second enactment clause of Senate Bill 130/House Bill 302, 2010 Session of the General Assembly."

The new Retail Sales and Use Tax exemption (the "data center exemption") would apply to the purchase or lease of the items concerning which you seek guidance as set forth below.

Qualifying Data Centers

As an initial matter, in order for the purchase or lease of tangible personal property to qualify for the data center exemption, the property must be purchased or leased for use in a qualifying data center. A qualifying data center is a data center (i) that is located in a Virginia locality; (ii) that on or after January 1, 2009 results in a new capital investment of at least $150 million; and (iii) that on or after July 1, 2009, results in the creation of at least 50 new jobs associated with the operation or maintenance of the data center, provided that such jobs pay at least one and one-half times the prevailing average wage in that locality. The requirement of at least 50 new jobs is reduced to 25 new jobs if the data center is located in a locality that has an unemployment rate for the preceding year of at least 150 percent of the average statewide unemployment rate for such year as determined by the VEDP or is located in an enterprise zone.

Prior to claiming the exemption, any qualifying person (see below) claiming the exemption must enter into a memorandum of understanding with VEDP that, at a minimum, provides the details for determining (i) the amount of capital investment made; (ii) the number of new jobs created; (iii) the timeline for achieving the capital investment and new job goals; (iv) the repayment obligations should those goals not be achieved; and (v) any conditions under which repayment by the qualifying person claiming the exemption may be required.

Persons Qualified to Claim the Data Center Exemption

Any owner of a qualifying data center who is a party to a memorandum of understanding with the VEDP regarding the data center may exercise the exemption for the purchase or lease of qualifying property (see below). TAX will issue an exemption certificate to the qualifying person.

Additionally, a real property contractor may exercise the data center exemption for the purchase or lease of qualifying property by executing a Form ST-11A Virginia Sales and Use Tax Certificate of Exemption and presenting it to its vendors. The contractor is required to attach a copy of the exemption letter issued by TAX to the qualifying data center to the Form ST-11A. TAX is currently revising Form ST-11A to allow its use with respect to the new data center exemption.

Property Qualifying for the Exemption

Finally, in order for the purchase or lease of tangible personal property to qualify for the exemption, it must be computer equipment or enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware, including chillers and backup generators used or to be used in the operation of equipment qualifying for the datacenter exemption. In addition, any property purchased or leased to upgrade, supplement, or replace qualifying property purchased or leased in the initial investment will qualify for the exemption.

The exemption does not apply to other computer software otherwise taxable under the Retail Sales and Use Tax that is sold or leased separately from the computer equipment, nor does it apply to general building improvements or other fixtures.

Servers, Mainframes, Network Infrastructure, and Data Storage Hardware

The data center exemption specifically exempts computer equipment used for the processing, storage, retrieval, or communication of data. To the extent that servers, mainframes, network infrastructure, hardware for data storage and other computer equipment are used for the processing, storage, retrieval, or communication of data, such equipment would qualify for the exemption.

Cabling, Switches, Directors, and Wiring

To the extent that cabling, switches, directors, and wiring and similar items are used in the operation of equipment qualifying for the data center exemption, such property would qualify for the exemption. However, the data center exemption would not apply to general building improvements or other fixtures.

Generators, Radiators, Exhaust Fans, and Fuel Storage Tanks

The data center exemption specifically applies to generators used in the operation of equipment qualifying for the data center exemption. To the extent that radiators, exhaust fans, fuel storage tanks, and similar items are used to provide electricity, such property would also be exempt. See Public Documents 95-38 and 95­110.

However, fuel otherwise subject to the Retail Sales and Use Tax would not be considered computer equipment, enabling software, or enabling hardware for the purposes of the data center exemption and would be taxable.

Substations, Power Distribution Equipment, Cogeneration Equipment, Batteries, and Other Electrical Equipment

The Taxpayer anticipates that it will have an exterior dedicated business-owned substation. An electrical substation is a subsidiary station of an electricity generation, transmission and distribution system. To the extent the electrical substation, power distribution equipment, cogeneration equipment, batteries and other electrical equipment are used to provide electricity, such property would also be exempt.

Chillers, Computer Room Air Conditioners (CRACs), Heating, Ventilating, and Air Conditioning (HVAC) systems, and Cooling Towers

The data center exemption specifically exempts chillers used in the operation of equipment qualifying for the data center exemption. To the extent that chillers, computer room air conditioners (CRACs), heating, ventilating, and air conditioning (HVAC) systems, cooling towers, and similar items are used to provide the proper environment in the data center, e.g., temperature and humidity, such equipment would qualify for the data center exemption.

Piping, Pumps, and Storage Tanks for Water

In order to operate the chillers, chilled water is stored in tanks and pumped through piping. To the extent that storage tanks, water pumps, piping, and similar items are used to operate chillers and other cooling systems to provide the proper environment in the data center, e.g., temperature and humidity, such equipment would qualify for the data center exemption.

Monitoring Systems

Tangible personal property used to monitor the data center's power generation, transmission and distribution equipment may also qualify for the data center exemption. To the extent that the systems are used to exercise! remote control over exempt equipment and to identify specific repair and maintenance needs of exempt equipment, the monitoring systems would qualify for the data center exemption. However, equipment used for external surveillance and security of buildings and tangible personal property, such as fire alarm systems and burglar alarm systems, would be taxable as the equipment would be considered general building improvements and not computer equipment, enabling software, or enabling hardware for the purposes of the data center exemption.

Cabinets, Racks, and Cable Trays

Equipment cabinets, battery racks, and cable trays will also be purchased or leased by the Taxpayer. These items are specialized pieces of equipment that are specifically designed to ensure that the servers and other exempt equipment function properly. Such equipment would be considered enabling hardware for the purposes of the data center exemption and would be exempt.

Computer Software

The data center exemption specifically exempts computer software used for the processing, storage, retrieval, or communication of data when the software is sold or leased with the exempt computer equipment.

The data center exemption would not apply to computer software that is sold or leased separately from such computer equipment. However, computer software not qualifying for the datacenter exemption would not necessarily be subject to the Retail Sales and Use Tax. It is the Department's long-standing policy that the sale of prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation. See Va. Code § 58.1-609.5 (1) and Public Document 05-44. This policy is conditioned on the fact that no disc, tape or other tangible medium is provided to the customer before or after the electronic download of the software.

Also, while computer software delivered by some tangible medium is generally subject to the Retail Sales and Use Tax, custom computer software is specifically excluded from the definition of "tangible personal property" under Va. Code § 58.1-602, and the sale of such programs is not subject to the Retail Sales and Use Tax. A "custom program" is defined in Va. Code § 58.1-602 as "a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does riot constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom."

Upgrades to the Facility

General upgrades to the facility, such as repairing or replacing roofs and lighting fixtures and modifying rooms, would be considered general building improvements or other fixtures and not computer equipment, enabling software, or enabling hardware for the purposes of the data center exemption and would be taxable. Fencing around the data center for safety and security would also be considered a general building improvement or other fixture and would be taxable.

Reimbursement Process

The enactment clauses of House Bill 302 and Senate Bill 130 along with Item 96(L) of House Bill 30 authorize a grant of up to $3,420,000 for the reimbursement of sales and use taxes paid by a qualifying data center for qualifying property purchased or leased on or after July 1, 2009, and before July 1, 2010.

The taxpayer should contact TAX to arrange a review of the Taxpayer's records related to its reimbursement request. It is the responsibility of the Taxpayer to furnish complete documentation to confirm that the sales or use tax has been paid on qualifying property. TAX will issue a certificate to the Taxpayer confirming the amount to be reimbursed. The Taxpayer should present the certificate to VEDP in order to be reimbursed for the tax paid.

CONCLUSION


In conclusion, all of the tangible personal property included on the list provided by the Taxpayer are exempt except for the upgrades to the security, modifications to the rooms in the facility, fencing around the facility, the roofs, the lighting fixtures, and the fiber optic network for the fire alarm system. From the description provided by the Taxpayer, the professional fees included on the list are not tangible personal property and would not be subject to the Retail Sales and Use Tax.

The Va. Code sections and regulations cited, along with other reference documents, are available on-Iine in the Tax Policy Library section of TAX's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
                • Sincerely,

                • Linda Foster
                  Deputy Tax Commissioner




PD/1-4100913437


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46