Texas Strengthens Data Center Incentives

The Texas House Bill 1223 passed in June 2013 puts Texas at the forefront of competitive advantages for Data Centers. The tax break adds to the state’s relative cost advantage in addition to a compelling list of existing attributes such as relatively low cost of power, robust fiber infrastructure, large well-educated workforce, low cost of living and affordable real estate.

Data centers basically house the equipment (servers and routers) for processing, storage and distribution of data. They provide the infrastructure to maintain IT functions, enable cloud computing, and support disaster recovery requirements for businesses across all industries. Demand for data centers continues to grow as more business activity moves online.

Over a ten year period a data center can effectively contribute between $500 million and $1.7 billion to the Texas economy, depending on the size.

Since 2005, 17 states including Texas have implemented custom incentives for data centers. Programs in other states are similar to the new Texas program, providing full or partial exemptions from sales tax on various equipment and investments when minimum thresholds are reached.

Prior to the legislation, Texas had a relative cost disadvantage due to local tax rates which, when combined with state sales tax rates, could reach 6.25% to 8.25% depending on the local rate. In effect a $10 million investment would incur $625,000 to $825,000 in sales tax.

The new Texas program provides 100% exemption of sales taxes on business personal property necessary to the data center operations, for 10-to-15 years. The property can include computers, electrical equipment, cooling systems, power
infrastructure, and software. The incentive is available to owners as well as tenants at single- and multi-tenant data center properties.

The minimum thresholds for eligibility include:

  • 100,000 sq ft of gross building area
  • $200 million of total capital investment
  • create 20 new direct jobs
  • pay wages equivalent to 120% of the country average

Texas does have a favorable business tax structure, with no corporate income tax and a franchise tax based on gross receipts or sales occurring within the state. Marginal franchise tax, where incurred, is among the lowest when compared to competitive data center locations. The new legislation therefore makes a sizable impact in the competitive advantages of locating a data center in Texas.

When a Texas community is selected for a data center, the impact on the community’s economy is primarily in the initial investment, including construction which will last around two years. Though there are typically fewer jobs created, the jobs command higher salaries.

Source: CBRE Texas Viewpoint, September 2013.

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