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TITLE: commerce authority; data center equipment |
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SPONSOR: Mesnard |
STATUS: As Introduced |
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PREPARED BY: Rebecca Perrera
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Description
The bill would expand the transaction privilege (TPT) and use tax exemption for data center software. Currently, only "enabling" software is exempt; the bill would expand the exemption to all software that is installed on a computer server within a qualified data center. The bill would be retroactive to September 12, 2013. As with the current tax exemptions, the bill's expansions apply only to data centers certified by the Arizona Commerce Authority (ACA) as having met certain conditions.
Estimated Impact
The bill would result in an ongoing reduction of General Fund revenue collections to the extent that it exempts additional business expenses from TPT and use tax. Because the exemptions in the bill would be retroactive to September 12, 2013, the bill also has a one-time impact due to refund payments.
The JLBC Staff estimates that the revenue reductions as a result of the bill would be as follows. These estimates are speculative due to data constraints.
· A one-time revenue reduction of $(10,000) in FY 2021. The bill caps the aggregate amount of refund claims at $10,000 for all jurisdictions. If claims exceed this cap, the Department of Revenue (DOR) shall reduce each claim proportionately. This amount represents refunds that would be owed to companies that have been paying TPT and use tax on expenses that would now be exempt under SB 1124.
· An estimated ongoing reduction of General Fund collections of $(1.9) million annually, beginning in FY 2021.
DOR and ACA have not responded to requests for the bill's fiscal impact.
Analysis
Background
Laws 2013, 1st Special Session, Chapter 9 provided tax relief for the owner, operator, or colocation tenants of certain data centers. Specifically, it exempted data center equipment purchases from retail TPT and use tax.
In order for a computer data center to qualify for the TPT exemption, they must first apply for certification through ACA. The certification process requires that a computer data center submit the anticipated investment with the data center to the ACA. In order to qualify for certification, the data center must then meet one of the following criteria:
1) The computer data center must make a minimum investment of $25 million, including land, buildings, modular units, and equipment over the next 5 years if located in a rural area.
2) The computer data center must make a minimum investment of $50 million, including land, buildings, modular units, and equipment over the next 5 years if located in an urban area.
3) The computer data center must make a minimum investment of $250 million including land, buildings, modular units, and equipment over the preceding 6 years prior to September 2013.
(Continued)
If a computer data center meets the above criteria, they may receive the tax incentives mentioned above for a period of up to 10 years. Under certain circumstances, the exemption period can be extended to 20 years. In addition, in order for a colocation tenant to qualify for the TPT exemption, the colocation tenant must occupy space at a certified data center for at least 2 years and use at least 500 kilowatts of electricity per month.
Currently, there are 28 certified data centers in the state. In addition, there are a total of 87 certified co-located data center tenants.
State Revenue Loss -Expanding Software definition
Under current law, businesses are exempt from paying TPT or use tax on "enabling software". DOR has interpreted this to include software required for the operation of the data center, which does not include certain types of "application software".
Existing data centers have challenged DOR's interpretation of current statute, contending that all software expenditures should currently be tax exempt. An initial ruling by the Office of Administrative Hearings sided with DOR's interpretation. Therefore, there would be an ongoing cost as the result of future software spending.
In addition to refunds for taxes already paid on software, there would be ongoing costs as the result of future software spending.
Based on auditing work conducted by the City of Phoenix on data center software transactions and extrapolating to the state, the JLBC Staff assume the resulting loss in state revenue would be $(7,600) per co-located tenant in a certified data center. The JLBC Staff assumes that half (14) of the state's certified data centers have an average of 12 certified tenants and the other half of the state's certified data centers are enterprise-level data center with only 1 company making software purchases equivalent to 6 certified co-location tenants. The annual impact to the state General Fund would be $(1.9) million. The JLBC Staff, however, lacks the necessary information to validate our methodology so this estimate is speculative.
Local Government Impact
Counties
To the extent that SB 1124 reduces state revenues collections, it would also reduce county revenue collections. Under the statutory distribution formula for retail sales, counties receive 16.2% of total state TPT collections from such sales.
In addition, the bill would also affect the county excise taxes imposed on retail sales. All 15 counties in the state levy some type of county tax. Although these taxes are collected by the state, they are all distributed to the counties except
for the 0.5% transportation excise tax imposed in both Maricopa and Pima Counties. These excise taxes are directly allocated to the Maricopa Association of Governments (MAG) or Pima Association of Governments (PAG) rather than Maricopa or Pima County governments.
Cities
Cities currently receive 10.0% of total state TPT collections from retail sales. These city revenue distributions would be reduced under the bill. The exemptions under the bill would also reduce municipal TPT collections.
According to the ACA, the City of Phoenix has 13 certified data centers of which 6 are enterprise data centers and 7 have co-location tenants. Under the JLBC Staff's set of assumptions (described above), the impact to the City of Phoenix associated with its municipal TPT would be $(565,800). In comparison, in FY 2019 the City of Phoenix estimated the impact of the bill to be $(2.9) million. The JLBC Staff believe the 2019 estimate may be overstated as the City of Phoenix estimated an average of 51 co-located tenants per data center while the ACA reports a total of 87 statewide.
In addition to the ongoing revenue loss, cities and counties would also be required to issue refunds to companies that have been paying taxes on software and equipment that is exempt under SB 1124.
2/21/20