Tax loophole has East Side data centers in mind

OLYMPIA – Developers of data centers could get a significant tax break to build their facilities in hard-hit rural areas of Washington as the state looks for an edge in competing for the high-tech facilities. But the special break proposed for some companies could put similar projects planned for Washington’s urban cities at a disadvantage. Bills moving through the Legislature in the closing days of the session offer waivers of sales taxes on construction and equipment for the data storage centers, which can be multi-million dollar projects with buildings covering hundreds of thousands of square feet. Although Democrats have been trying to rein in tax incentives, or “loopholes,” this session in an effort to bring in more tax revenue, Gov. Chris Gregoire on Tuesday defended a new, narrowly drawn tax break for data centers: “These are ready to go projects.” Gregoire called the tax breaks “much needed help” as Washington competes with Oregon, Utah, Nevada and other states for the projects and tries to help distressed rural areas. “When you’ve got unemployment rates of more than 14 percent in some of these areas, you’ve got to do something.” Rep. Timm Ormsby, D-Spokane, prime sponsor of the House version of the tax incentive, said it also brings one of the state’s newest industries, technology, to the heart of its oldest industry, agriculture, with some good tradeoffs. Several data centers were built in Wenatchee and Quincy in the past decade, and more were on the drawing boards because of the area’s cheap power and affordable land prices. But in 2008, an opinion from Attorney General Rob McKenna said data centers don’t qualify for state tax breaks offered to new manufacturing plants in rural areas because data centers don’t manufacture anything. Without the tax breaks, “the data center industry in Eastern Washington has shut down,” said John Sabey, president of Sabey Data Centers. That company had plans for a facility as large as 525,000 square feet in Quincy, to be leased to West Side tech firms and built to order. Without the tax breaks, it didn’t make economic sense, Sabey said. But Marc Nemirow, senior executive for a firm planning a data center near Puyallup in Pierce County, said the exemption should be offered in urban areas, too. His real estate development and management firm, Benaroya, has started work on a three-phase data center. But if his competitors in Eastern Washington get tax breaks that he doesn’t get, “that’s a game stopper,” Nemirow said; the project will shut down and the construction workers will be laid off. “There is no logic in my mind to providing those advantages to one company and not another,” Nemirow said. The legislative proposal, to extend the rural county manufacturing tax breaks to data centers, seems to be crafted with the Sabey project in mind. When the state Department of Revenue did a fiscal projection for the bill, it estimated the amount of taxes a 525,000 square foot data center would save if the exemption was granted was $28 million for the construction. The fiscal impact to the state for granting the exemption was listed as zero. That’s because if the exemption doesn’t pass, data centers won’t be built in rural areas; they’ll be built in other states, and Washington won’t get any tax money, either, Mike Gowrylow, a spokesman for the department, said. Gowrylow said the fiscal note wasn’t specifically written for Sabey’s project; use of a same-sized project was just a coincidence. It is an unusual fiscal note, Gowrylow said, because this is an unusual exemption, proposed only for projects that start construction between April 1, 2010 and July 1, 2011, when some previously planned projects could be restarted. Sabey said extending the exemption statewide would be fine if that’s what the Legislature wants to do. Ormsby said the original idea for the bill was to extend the exemptions given new factories in rural areas to data centers for 15 months, to see if that really is the reason work stopped on data centers in the Columbia Basin. Extending it to other areas would mean expanding the factory exemption, but “it’s a conversation we’re willing to have.”