Under the Nebraska Advantage Act, what counts as 'investment in qualified property' for a data center operator and for its customers?

Plain-English summary

This ruling applies the Nebraska Advantage Act (a business tax-incentive program that rewards investment and job creation) to data centers -- both the company that operates the facility and the customers who put their servers inside it. The core question is what counts as "investment in qualified property," the figure that helps a business hit the Act's investment thresholds.

Is running a data center even a qualified activity? Yes -- for all investment tiers except Tier 1 -- because a data center is treated as a telecommunications-services business under Neb. Rev. Stat. § 77-5715(1)(b). (The operator houses customers' computers and keeps the data/communications, Internet, power, and environment running; it doesn't supply the customers' hardware/software or do their data processing.)

What the operator can count. Investment is qualified property located at the project and excludes anything rented to another or not at the project (§§ 77-5710, 77-5717). So the operator counts the parts of the facility (and the computers/equipment) used for its own qualified activities, but not the cages, cabinets, and equipment it rents out to customers. Facility cost is prorated by square footage:

qualified space (under cabinets plus other qualified activities) ÷ (total space − common areas) × facility cost.

The ruling's worked example: a 110,000-sq-ft, $13,000,000 facility with 38,000 sq ft of cabinets and 22,000 sq ft of telemarketing (both qualified), 40,000 sq ft of rented cages + disaster-recovery (nonqualified), and 10,000 sq ft of common areas → (38,000 + 22,000) ÷ (110,000 − 10,000) = 60%, × $13,000,000 = $7,800,000 of qualified facility investment. The calculation is based on full occupancy, not initial use, and can be reduced if the rented-cage portion changes significantly.

What a customer can count -- and the cage-vs-cabinet line that decides it:

• Cage (an enclosed, secured, exclusive area) = a lease of real estate. So the customer's cage lease payments and the cost of its computers/equipment in the cage are qualified property -- provided the location is interdependent with the rest of the customer's Advantage project.
• Cabinet (a shared-floor frame, not exclusive space) = not a lease of real estate. So cabinet rent and the customer's equipment placed in a cabinet are not "located at the customer's project" and don't qualify.
• Charges that aren't rent for space -- e.g., monitoring services and utilities -- are excluded either way, because they aren't payments for a lease of real estate.

What this means for you

Data center operators pursuing a Nebraska Advantage Act agreement

Operating a data center qualifies (except Tier 1) as a telecommunications-services business, but you can only count the facility and equipment tied to your own qualified activities. Rented-out cages, cabinets, and customer equipment come out of your investment number. Expect to allocate square footage across five buckets -- rented cages, nonqualified activities, cabinets, other qualified activities, and common areas -- and apply the proration formula at full occupancy.

Data center customers with their own Advantage projects

Whether your co-location spend counts turns on cage vs. cabinet. Lease a cage (exclusive, secured space) and you can include the cage rent plus your in-cage equipment as qualified property (if interdependent with your project). Rent a cabinet on a shared floor and none of it counts. And don't include monitoring or utility charges -- only the real-estate lease piece qualifies.

Common questions

Q: Does operating a data center qualify under the Nebraska Advantage Act?
A: Yes, for all tiers except Tier 1 -- a data center is treated as a telecommunications-services business under Neb. Rev. Stat. § 77-5715(1)(b).

Q: How does the operator figure its qualified facility investment?
A: Prorate facility cost by square footage: qualified space (under cabinets plus other qualified activities) divided by total space minus common areas, times facility cost -- excluding space and equipment rented to customers. The calculation uses full-occupancy allocation.

Q: Can a customer count its co-location costs?
A: Only for a cage (an exclusive, secured space treated as a real-estate lease): the cage lease payments and the equipment inside can qualify if interdependent with the customer's project. Cabinet rentals and equipment in cabinets do not qualify.

Q: Do monitoring and utility fees count for the customer?
A: No. Those aren't payments for a lease of real estate, so they're excluded from the customer's qualified property.

Citations and references

• Neb. Rev. Stat. § 77-5715 -- lists the qualified business activities under the Nebraska Advantage Act; § 77-5715(1)(b) (telecommunications services) is the basis for treating a data center as a qualifying business.
• Neb. Rev. Stat. § 77-5710 -- defines "investment" as the value of qualified property located at the project.
• Neb. Rev. Stat. § 77-5717 -- excludes from investment any property rented to another or not located at the project.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr291001.pdf

Original ruling text

Revenue Ruling 29-10-1
Nebraska Advantage Tax Incentives
March 9, 2010
DATA CENTERS
Issues:
What is considered “investment in qualified property” under the Nebraska Advantage Act for the
operator of a data center; and what is considered “investment in qualified property” for customers
who locate computers and other equipment in the data center?
Conclusions:
Investment in qualified property for the operator of a data center includes the cost for those
portions of the data center where the qualified activities are conducted by the operator, and the
costs for computers and equipment used in those activities. This does not include the cost of those
portions of the data center, or any equipment included in cages, which is rented to customers, or
the cost of cabinets or other property which is rented to customers.
Investment in qualified property for the customers of the data center may include the rental fees
paid for cages, and the cost of computers and other qualified property within the cages. This does
not include any equipment at a data center that is outside of a cage rented by the customers.
Definitions:
Cabinet. A standardized frame or enclosure for the holding of customer computer equipment within
the data center that is located in floor space shared with the call center and other customers.
Cage. A dedicated portion of a data center that includes floor space and walls, which is separated
for the use of a customer and that allows secured access to the equipment by the customer.
Common Areas. The portions of the data center that are used by the employees of the data center
and by a customer’s employees. This includes entryways, hallways, aisles between cages and
cabinets, rest rooms, and break areas.
Data Center. An environmentally-controlled facility designed for housing and facilitating computer
processing activities. A data center provides the infrastructure necessary for the co-location of
computer equipment that typically includes features such as raised flooring, electricity supply,
communication and data lines, Internet access, cooling, security, and fire suppression.
Nonqualified Activity. A nonqualified activity for the Nebraska Advantage Act is any activity that
is not included in Neb. Rev. Stat. § 77-5715 as a qualified activity. Nonqualified activities for a
data center would include emergency disaster recovery areas for customers, and equipment rentals
or sales.
Analysis:
An operator of a data center has applied for an agreement under the Nebraska Advantage Act.
The operator of the data center conducts several activities at the data center. The data center also
provides cabinets and cages for customers to locate and operate computers. Some of the customers
have Nebraska Advantage projects and want to include their activities at the data center in their
own projects.
Data Center Operations. The operation of a data center is a qualified activity under the Nebraska
Advantage Act for all investment tiers other than Tier 1. A data center is considered to be a qualifying
Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 29-10-1

March 9, 2010

Page 2 of 3

business because it provides telecommunications services. See Neb. Rev. Stat. § 77-5715(1)(b).
A data center is a facility where the customers can locate their computers. It does not provide
hardware or software that is used by its customers, and it does not provide data processing services
for the customers. The operator of the data center monitors the operations of the facility and is
responsible for diagnosing and correcting problems with the data and communications services,
Internet access, electricity, and environmental factors. The data center’s customers can use the
facility for a variety of purposes, including off-site computing, data storage or backup, and
emergency disaster recovery operations.
Data Center Investment in Qualified Property. Investment under the Nebraska Advantage Act
(Neb. Rev. Stat. § 77-5710) is the value of qualified property that is located at the project, and does
not include any property that is rented to another or that is not located at the project (Neb. Rev.
Stat. § 77-5717).
The investment in qualified property also includes computers and equipment located in the data
center which are used by the operator of the data center in qualified activities, but it does not
include nonqualifying investment such as the cost of the cabinets and other property that are rented
to customers.
The data center has investment in qualified property for the cost of construction or purchase of
the facility and infrastructure supporting the facility, but it does not include the cost for portions
of the facility that are rented to customers as cages. The cost is prorated based on the square
footage associated with the different activities. The total area of the facility has to be allocated to
floor space:
•
•
•
•
•

For cages rented to others;
Associated with nonqualified activities;
Under the cabinets;
Associated with other qualified activities; and
For common areas.

The total square footage under the cabinets and the square footage for other qualified activities
performed by the data center is divided by the total square footage in the facility, excluding the
floor space for any common areas. This result is multiplied by the total cost of the facility to
determine the investment in qualified property for the operator of the data center.
Example:
The data center has 110,000 square feet that cost $13,000,000. The floor space is
divided as follows:
• Cages rented to others (nonqualified), 28,000 sq. ft.;
• Customer emergency disaster recovery area (nonqualified), 12,000 sq. ft.;
• Cabinets (qualified), 38,000 sq. ft.;
• Telemarketing activities (qualified), 22,000 sq. ft.; and
• Common areas (excluded), 10,000 sq. ft..
The investment in the facility under the Nebraska Advantage Act for the operator is
calculated as follows: (38,000+22,000) ÷ (110,000-10,000) = 60%. This percentage
is multiplied by the cost of the facility (60% X $13,000,000), resulting in an
investment of qualified property of $7,800,000 for the facility.

Revenue Ruling 29-10-1

March 9, 2010

Page 3 of 3

The determination of the amount of investment will be based upon the calculation made when
the facility is fully occupied. The determination will not be based on the use of space when the
facility is first operational. The determination of the amount of the investment may be reduced if
the portion of the facility that is rented as cages changes significantly.
Customer Investment in Qualified Property. A customer with cage space in a data center has
an enclosed area for its exclusive use and control. This is considered to be a lease of real estate.
The customer has a location that may be included in a Nebraska Advantage Act project if it is
interdependent with the rest of the customer’s project. The lease payments to the operator of the
data center for the cage, and the cost of the customer’s computers and other equipment that are
located in the cage, are considered qualified property for the customer. This does not include
charges from the operator of the data center for items other than payments for lease of space. For
example, fees for monitoring services and utilities are not included because they are not charges
for a lease of real estate.
A customer renting all or part of a cabinet does not have an area for its exclusive use and control.
The customer is not renting real estate when it rents a cabinet, and therefore, this location cannot
be included in a Nebraska Advantage Act project. As a result, the rent paid to the operator of the
data center for the cabinet, and the cost of the customer’s computers and other equipment that are
placed in the cabinet, will not be “located at the customer’s project,” and are not qualified property
for the customer.
APPROVED:

Douglas A. Ewald
Tax Commissioner
March 9, 2010