Washington State Gov't uses Interpretation of Manufacturing Tax Law to Tax Data Centers

DataCenterKnowledge reports on the action by the Washington State Legislation to tax data center construction, removing a tax incentive all other gov'ts offer.

Legislation in Washington state that would have restored a tax break for data centers won't be passed in 2008, leaving Microsoft (MSFT) and Yahoo (YHOO) to mull the future of their plans to continue building in the state. Last month Microsoft and Yahoo halted construction on their multi-facility data center campuses in Quincy, Washington while state legislators debated the tax bill.

The tax package was drafted after the state ruled that data centers were no longer covered by a state sales tax break for manufacturing enterprises, and thus must pay a 7.9 percent tax on data center construction and equipment. Gov. Chris Gregoire requested an exemption in Senate Bill 6666, which would restore the exemption for data centers. The bill was caught up in tax politics, with media terming it a $1 billion tax break for high-tech giants.

The details of what is in the interpretation are:

In their Nov. 21 written response to Holmquist, McKenna and Assistant Attorney General Suzanne Shaw found that the state law establishing the tax break intends that "manufacturing does not include 'the production of computer software if the computer software is delivered from the seller to the purchaser by means other than tangible storage media, including the delivery by use of a tangible storage media where the tangible storage media is not physically transferred to the purchaser.' As we understand it, with respect to data accessed and manipulated by the Internet companies' customers under the circumstances about which you inquire, there neither is a sale nor transfer of electronic data through a tangible storage medium."

So, if there was an energy consuming wasteful retail software facility, the companies would get the tax break.  But, given they use the Internet to deliver software, no tax break. How wasteful is that?

Ultimately, this is all about Washington State going after tax revenue in a year when they are going to have shortfalls, and long term they are going to drive data centers to other states.