Washington State Sales Tax Drives Microsoft Windows Azure Servers to Texas

Mary-Jo Foley at ZDNnet picked up news on Microsoft’s decision to remove USA- Northwest from a deployment choice for Windows Azure.

Tax concerns to push Microsoft Azure cloud hosting out of Washington state

Posted by Mary Jo Foley @ 11:55 am

Microsoft is making preparations to move applications that developers are hosting on its Azure cloud infrastructure out of its Washington state datacenter, due to a change in the tax laws there.

Microsoft warned customers testing their apps on the Azure test release about the planned change earlier this week. Microsoft is readying a migration tool to help testers with the move, company officials said.

Cloud-computing and .Net expert Roger Jennings put together all the various reports and clues into a detailed August 5 post on his OakLeaf Systems blog.

Mary Jo does a good job of referencing where the news came from.

The Windows Azure team.

As Jennings noted, on August 3, the Windows Azure team announced plans to disable the “USA - Northwest” option for new Azure-hosted applications. (Existing applications that are part of the Azure beta may be allowed to remain hosted in the Quincy, Wash., datacenter, as the Microsoft blog post says. Later on, the team appears to contradict that fact, however, saying all apps and storage would be moved.)

From the Azure team’s post:

“This change is in preparation for our migration out of the northwest region. Due to a change in local tax laws, we’ve decided to migrate Windows Azure applications out of our northwest data center prior to our commercial launch this November. This means that all applications and storage accounts in the ‘USA - Northwest’ region will need to move to another region in the next few months, or they will be deleted.”

One error is she references data center knowledge this year, but it was actually a year and a half ago in Mar 2008 where Rich Miller reported on the Washington state sales tax change.

Earlier this year, there were reports that Microsoft (and Yahoo) had halted datacenter construction in Quincy. At that time, many company watchers believed the halt was likely temporary and was due to the poor economy. It turns out it was due to a Washington state tax change, as DataCenter Knowledge explained.

“Late last year Washington State attorney general Rob McKenna 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.”

I wrote my own blog entry Mar 2008.

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.

Here is the Windows Azure blog entry http://blogs.msdn.com/windowsazure/archive/2009/08/04/migrating-from-usa-northwest.aspx