Tax Exemption for Texas Data Centers, Simplified

Since 2013, Texas provides a sales tax exemption for “qualified data centers” that applies to electricity as well as purchases of tangible personal property necessary to operate the data center.

The Comptroller’s most recent estimate is that over $1 billion in sales taxes will be exempted under this exemption this year, and about $1.7 billion in 2030. With so much money at stake, it is important for data center owners and operators to understand the opportunities and pitfalls related to this exemption.

Overview

An owner, operator and/or occupant of a data center can apply to the Comptroller's office for certification of the facility as a qualified data center. 

A “data center” is a facility of 100,000 square feet or more that has been, or will be, constructed or refurbished to house servers and related equipment for processing, storing or distributing data.

The Comptroller’s approval is necessary to certify a data center meets the specific requirements related to capital investment and job creation as a “qualifying data center.”

Certain items necessary and essential to the operation of a qualified data center are exempt from the 6.25% state sales and use tax. Local sales taxes are still due on purchases of these qualifying items.

Certification Requirements

Applicants must hold or have applied for a Texas Sales or Use Tax Permit or a Texas Direct Payment Permit when submitting the data center application. Applicants must meet all of the following for certification as a qualifying data center:

The qualifying owner, operator or occupant of the applicant data center must (jointly or independently) commit to: (1) creating at least 20 qualifying jobs in the county in which the data center is located, not including jobs moved from one Texas county to another; and (2) making, or agreeing to make, a capital investment of at least $200 million in the applicant data center over a five-year period that begins on the Comptroller’s certification date. Documentation outlining the plan to meet the capital investment and jobs requirements must be provided with the application. Information provided on and with the application is confidential.

The applicant data center must: (1) be, or will be, located in Texas, (2) have, or will have, at least 100,000 square feet of space in a single building or portion of a single building that is, or will be, used by a single qualifying occupant as a data center (the single qualifying occupant may not sublease), (3) be, or will be, specifically constructed or refurbished for use primarily as a facility to house servers and related equipment and support staff in the processing, storage and distribution of data, (4) have, or will have, an uninterruptible power source, generator backup power, a sophisticated fire suppression and prevention system, and enhanced physical security that includes restricted access, video surveillance and electronic systems, (5) not be used primarily by a telecommunications provider to deliver telecommunications services, and (6) not be subject to a Chapter 313 (value limitation agreement.

Claiming the Exemption on Qualifying Purchases

Once certified, the Comptroller's office will issue a unique registration number to the qualifying data center and each qualifying owner, qualifying operator and qualifying occupant who applies and establishes eligibility for the exemption.

To claim the data center exemption on a purchase, a qualifying party must provide the seller an exemption certificate listing the registration number of the data center and its own registration number on Form 01-929. Again, this exemption only applies to the 6.25% state sales tax, so the retailer should collect the applicable local sales and use tax.

Qualifying Purchases

The following items, if necessary and essential to the operation of a qualifying data center, are eligible for the exemption

• Electricity (a predominant use study may be required),
• an electrical or cooling system,
• an emergency generator,
• hardware or a distributed mainframe computer or server,
• a data storage device,
• network connectivity equipment,
• a rack, cabinet and raised floor system,
• a peripheral component or system,
• software,
• a mechanical, electrical or plumbing system that is necessary to operate any tangible personal property described above,
• any other item of equipment or system necessary to operate any tangible personal property described above, including a fixture, and
• a component part of any tangible personal property described above.

Nonqualifying Purchases

Nonqualifying purchases include but are not limited to (1) office equipment or supplies, (2) maintenance or janitorial supplies or equipment, (3) supplies or equipment used primarily in sales activities or transportation activities, (4) tangible personal property on which the purchaser expects to or has received a refund for enterprise projects, (5) tangible personal property not otherwise exempted above that is incorporated into real estate or into an improvement of real estate, (6) tangible personal property that is rented or leased for a term of one year or less, a taxable service that is performed on tangible personal property exempted by this exemption, and (7) activities that constitute nonresidential real property repair or remodeling.

Exemption Period

The exemption lasts for 10 years for capital investments between $200-$250 million and 15 years for a capital investment of at least $250 million.

The Comptroller will audit each qualifying data center at its five-year anniversary to verify the amount of capital investment actually made and jobs created.

The applicant is responsible for notifying the Comptroller once all 20 jobs have been created and the Comptroller will review job information annually until it is verified that each qualifying job has been retained for at least five years. If the certification requirements are not met, the Comptroller will terminate the data center's certification and revoke all related registration numbers.

Purchasers of an Existing, Certified Qualifying Data Center

New purchasers must apply for a registration number. The new applicant (purchaser) should include the registration number of the existing qualifying data center with the application.

When the Comptroller's office processes the application, the effective date of the new applicant's (purchaser's) registration number will be made retroactive to the date the associated qualifying data center was certified by the Comptroller.

The purchaser can submit the refund request to the Comptroller's office with the application for registration or return to the retailer for a refund after receiving the registration number.

Let's Talk

Don’t leave money on the table. Whether you're planning a build or already operating, we can help you navigate the application process, maximize your exemption, and stay audit-ready. Reach out today and let’s make sure you get the savings you deserve.

*A public listing of registered data centers can be found here: Data Centers in Texas.

To learn more about LGT and how we can serve you, contact us here.