Earlier this year, Maryland followed in the footsteps of a number of other states by enacting tax incentives for individuals or businesses operating a qualified datacenter in Maryland. The incentives consist of a sales tax and personal property tax exemption on qualifying datacenter personal property. To qualify for the exemptions, which took effect on July 1, 2020, a purchaser must invest at least $5 million in qualifying datacenter personal property and create at least five new jobs within three years. The minimum investment is reduced to at least $2 million if the datacenter is located in a Tier 1 area.
A qualifying datacenter includes a co-located or hosted datacenter where equipment, space, and bandwidth are available to lease to multiple customers (i.e. running the datacenter is your business) as well as an enterprise datacenter owned and operated by the company which it supports. Equipment qualifying for the exemptions includes computer equipment (e.g., servers and routers) and enabling software; heating, ventilation, and air conditioning and mechanical systems; and equipment necessary for the generation, transformation, transmission, distribution, or management of electricity (e.g., exterior substations, generators, and transformers). The qualifying new jobs must be full-time positions paying wages that are at least 150% of state minimum wage.
Taxpayers must submit an application to the Department of Commerce to be eligible for the tax exemptions. Once a taxpayer obtains an eligibility certificate, it must be renewed each year (for up to 10 years) to continue to obtain the personal property tax exemption and sales tax exemption on subsequent purchases. In the event that an investment of at least $250 million is made in qualified datacenter personal property, a taxpayer is eligible for the tax exemptions for up to 20 years.
Maryland’s new incentives for datacenters appear rather competitive when comparing them to similar programs implemented in other states. For example, Idaho also passed a datacenter sales tax exemption that took effect July 1, 2020. Idaho’s program requires a minimum of $250 million capital investment. Moreover, instead of five new jobs required in Maryland over the course of three years, Idaho requires the creation of 30 new jobs within two years. Similarly, Virginia’s datacenter sales tax exemption, which has been in place for over a decade, requires a minimum capital investment of $150 million and the creation of 50 new jobs.
Maryland clearly studied Virginia’s program in some detail in determining at what level to set investment and job creation requirements. The Fiscal and Policy Note accompanying Maryland’s legislation discusses a report that reviewed Virginia’s program in which datacenter representative voiced concerns about the 50 new jobs requirement. Such representatives claimed the “50-job requirement is not in line with the capital investment requirement” as “data centers continue to become more efficient through automation, which means fewer jobs are necessary.” A capital investment of $150 million was reported to create, on average, 24 new jobs.
Businesses making a decision regarding where to locate a data center should take note of the different incentives being offered by various states. As noted above, there is stark contrast in the minimum capital investment required for a taxpayer to be eligible for Maryland’s exemptions ($5 million) as compared to Virginia’s ($150 million). Further, businesses should not overlook the method by which each state imposes its income tax on business. For example, assuming the business has multistate activities, the apportionment formula and sales factor sourcing rules can likely have a larger impact on the ultimate income tax liability than the tax rate.
Datacenter operators seriously considering Maryland as a viable location should also be aware that the state has a grant program to encourage the implementation of cost-effective energy-efficient equipment in Maryland datacenters. Grants range from $20,000 to $200,000 per eligible project and are designed to cover up to 50% of the cost (up to $200,000) of energy efficiency equipment.
If you have questions regarding Maryland’s new datacenter tax incentives, please contact your Aronson tax advisor or Michael L. Colavito, Jr.