By Evan Hamme and Charlie Kearns
Purchases of “data center equipment for assembly, use, or consumption in the operations of a qualified data center” on or after January 1, 2016, are exempt from Michigan sales and use tax. M.C.L. §§ 205.54ee, 205.94cc; see generally Notice Regarding Data Center Exemption, Feb. 5, 2016. The data center exemption will sunset on January 1, 2036 or, as discussed below, two earlier dates if certain job creation benchmarks are not met.
For purposes of Michigan’s new data center exemption, a “qualified data center” is “a facility composed of 1 or more buildings located in [Michigan that is] owned or operated by an entity engaged at that facility in operating, managing, or maintaining a group of networked computers or networked facilities for the purpose of centralizing . . . the storage, processing, management, or dissemination of [one or more persons’] data.” To qualify for the exemption, a qualified data center must also generate 75% or more of its revenue from one or more “colocated businesses” that are not “affiliates” of the qualified data center. A “colocated business” is a “person that has entered into a contract with the . . . qualified data center to use or deploy data center equipment physically located within the qualified data center for a period of 1 or more years.” The new law defines “affiliate” to mean a person that controls or is controlled by the qualified data center, or a person that is under common control with the qualified data center; however, the exemption statute does not specify a specific ownership threshold required for “control.” Importantly, the Michigan data center exemption provides that exempt “data center equipment,” includes “only computers, servers, routers, switches, peripheral computer devices, racks, shelving, cabling, wiring, storage batteries, back-up generators, uninterrupted power supply units, environmental control equipment, other redundant power supply equipment, and prewritten computer software used in operating, managing, or maintaining the qualified data center or the business of the qualified data center or a colocated business.”
The exemption is set to expire December 31, 2035, but two provisions in the new law could cause the exemption to expire at an earlier date unless the Michigan Department of Talent and Economic Development (TED) determines that certain benchmarks are met. Under the first benchmark date for the exemption to continue to apply, colocated businesses and qualified data center contractors must have created a sufficient number of at least 400 data center industry jobs or related jobs by January 1, 2022, or the exemption will be repealed as of that date. Under the second benchmark date, at least 1,000 such jobs must be created by January 1, 2026, or the exemption will be repealed as of that date.