Background
The Ohio Data Center Exemption provides relief from sales and use tax imposed on the construction of and tangible personal property used to operate a qualified data center. To be eligible for the exemption, the taxpayers operating at the project site are required to:
- invest at least $100,000,000 in capital investment during a period of three consecutive calendar years. Ohio Revised Code (R.C.) 122.175(A)(5)(a)(iii); and
- generate at least $1,500,000 in annual payroll for each year of the agreement beginning on or after the first day of the twenty-fifth month after the agreement was entered into under this section. C. 122.175(A)(5)(b).
The exemption applies to “Computer data center equipment.” As defined by R.C. 122.175(A)(4), this includes tangible personal property used or to be used to conduct a computer data center business, to generate, transform, transmit, distribute, or manage electricity necessary to operate the tangible personal property used or to be used in conducting a computer data center business, and as building and construction materials sold to construction contractors for incorporation into a computer data center.
Opportunities
This definition leaves room for interpretation as to what qualifies for the data center exemption. Additionally, some services may also qualify for the exemption including delivery, installation and repair. Businesses should analyze their purchases to ensure they are taking full advantage of the sales tax exemption. For example, the Ohio Department of Taxation (“Department”) generally argues that costs to construct a parking lot do not qualify although some may argue that those costs fit within the statutory language.
Pitfalls
Vendors that sell tangible personal property to and construction contractors that install real property for businesses claiming the data center exemption need to be aware of the exemption certificate/direct payment permit process to protect themselves from taking on any sales/use tax liability. By obtaining the direct payment permit, vendors are relieved of any liability. Construction contractors are required to obtain the STEC CC, Sales and Use Tax Construction Contract Exemption Certificate, to document the proper exemption.
At last month’s Ohio Tax Conference, Department officials warned that some of the data centers do not have a 100% exemption as some data centers only receive a 50% or 75% exemption. In which case, construction contractors will need to pay sales or use tax on the non-exempt portion of the materials being installed into real property. Keep in mind that a direct payment permit does not apply to real property.
If you have questions about the data center exemption or what costs are qualified by the exemption, please contact Deb McGraw or John Trippier or one of our other ZHF professionals.