If a certified Texas data center occupant expands into a new, physically separate building on the same campus, does that new space count as part of the original certified data center for tax-exemption purposes?

Plain-English summary

The occupant of a data hall complex within a large 70-acre data center park (seven buildings, 642,000+ square feet, fully leased) asked the Comptroller about expanding its certified data center operations. Its existing lease covered six data halls (7.2 MW of power) inside a single building, already certified as a "qualifying data center" under Tax Code Section 151.359. The occupant had a lease option to add two more data halls — but no room remained in that same building, so the expansion would have to go into one of three brand-new buildings the property owner planned to construct elsewhere on the campus. The new and existing spaces would be physically connected (shared conduits, wiring, access control, power source, and service drive) and functionally integrated for the same tenant, but housed in a different building.

The occupant asked the Comptroller to confirm three things about the expansion space: (1) that it counts as part of the existing certified data center; (2) that jobs and capital investment there count toward the exemption's job-creation and capital-investment thresholds; and (3) that tangible personal property and electricity purchased for it are exempt.

The Comptroller ruled against the occupant on the core question. Section 151.359(a)(2) defines a data center as space "in a single building" — and applying the plain, ordinary meaning of "single" (unaccompanied by others, one part or portion), physical connection and functional integration between two separate buildings doesn't make them one "single building." Reading the statute to allow the expansion space to count would read the word "single" out of the law entirely.

That single-building ruling then drove the rest of the analysis: capital investment in the expansion space doesn't count toward the exemption's capital-investment requirement (because it's tied to the certified single-building facility), and tangible personal property or electricity purchased for the expansion space isn't exempt either (same reasoning) — with a further wrinkle that if the two spaces share a single electric meter, a predominant use study would be needed to split out taxable (expansion) from exempt (original certified space) electricity use.

The one point that came out in the occupant's favor: qualifying jobs. A "qualifying job" under Section 151.359(a)(5)/(d)(2)(A) only has to be located in the same county as the qualifying data center — it doesn't have to be physically housed within the certified building. So new jobs created in the expansion space (in the same county) still count toward satisfying the exemption's overall job-creation requirement, even though the expansion space itself isn't part of the certified data center for exemption or capital-investment purposes.

What this means for you

Data center occupants and operators planning campus expansions

Don't assume physically connected or functionally integrated buildings on the same campus automatically share one certified data center's exemption. If you outgrow your certified building, expanding into a separate structure — even next door, even wired together — starts a fresh building-by-building analysis for capital investment and TPP/electricity exemption purposes. Only the job-count requirement travels with you across the same county.

Data center campus developers/landlords

If a tenant's growth plan depends on treating multiple buildings as a single qualifying data center for tax purposes, structure the certified footprint (and any construction phasing) to fit entirely within one building from the start, or plan for a separate certification process for expansion buildings.

Accountants and tax professionals

Note the predominant-use-study wrinkle: if the original certified data center and an uncertified expansion space in a different building draw electricity from a shared meter, Rule 3.335(b)(1)(A) requires a predominant use study (per Rule 3.295) to separate exempt from taxable electricity use — a practical complication worth flagging early in any phased-expansion project.

Common questions

Q: Does "functionally integrated" or physically connected space count as the same building?
A: No. The Comptroller applied the plain meaning of "single building" and held that physical connections (conduits, wiring, shared power, access control) don't erase the separateness of two distinct structures for purposes of Section 151.359(a)(2).

Q: Do new jobs created in the expansion space still help meet the exemption's job-creation requirement?
A: Yes. A qualifying job only needs to be in the same county as the qualifying data center — it doesn't need to be inside the certified building itself.

Q: Is electricity for the expansion space ever exempt?
A: Not under this analysis, since the expansion space isn't part of the certified qualifying data center. If electricity is drawn from a shared meter with the certified space, a predominant use study is needed to separate the taxable and exempt portions.

Q: Can another data center occupant rely on this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to this taxpayer and these facts, and cannot be relied upon by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.359(a)(2) (data center defined as single-building space)
• Tex. Tax Code § 151.359(a)(5), (b), (d)(2) (qualifying job; exemption; job/capital investment requirements)
• 34 Tex. Admin. Code Rule 3.335(a)(1), (a)(6), (a)(7), (b)(1) (data center certification, capital investment, qualifying job, predominant use)
• 34 Tex. Admin. Code Rule 3.295 (natural gas/electricity predominant use)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201510543L

Original ruling text

October 16, 2015

Re: Private Letter Ruling #142740466

Dear *****:

We issue this private letter ruling in accordance with Rule 3.1 in response to your request dated September 30, 2014. Detrimental reliance is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the Comptroller’s interpretation of the exemption for qualifying data centers, set out in Tax Code Section 151.359, as it relates to the expansion of an existing qualified data center.

Facts Presented

***** (“TAXPAYER”) is the occupant of a 70-acre campus being redeveloped as a data center park. The campus has seven buildings consisting of more than 642,000 gross square feet that is currently leased to capacity. The owner, COMPANY A, plans to build three new buildings on the campus in an effort to almost double the available square footage. Each building is constructed so that it may be divided to contain multiple discrete data halls which can be networked together.

TAXPAYER and COMPANY A signed a lease for an initial term of eleven years and which covers six data halls with 7.2 MW of power. The six data halls are contained within a single building. The leased space was certified as a qualifying data center pursuant to Rule 3.335, the “TAXPAYER Data Center”, with COMPANY A as the “qualifying owner” and TAXPAYER as the “qualifying occupant”. The TAXPAYER lease includes an option for TAXPAYER to expand the TAXPAYER Data Center by adding two additional data halls, each containing 10,000 square feet of space and 1,200 kW of power. TAXPAYER desires to expand its existing operations; however, there is no additional square footage available in the single building in which the TAXPAYER Data Center is located.

TAXPAYER and COMPANY A plan to expand the existing data center operations to include the additional data halls in one of the new structures on COMPANY A’s campus (i.e., the expansion space). The expansion space and the TAXPAYER Data Center will be in separate buildings but will be functionally integrated to the exclusion of other tenants.

Ruling and Analysis

Our restatement of the rulings you requested is shown below, followed by our response and analysis.

Request: The expansion space to be leased by TAXPAYER will be treated as part of the TAXPAYER Data Center for purposes of Texas Tax Code Section 151.359.

Response: Tax Code Section 151.359(a)(2) states in relevant part that a data center means at least 100,000 square feet of space in a single building or portion of a single building. (Emphasis Added.)

The language of the statute is clear and unambiguously defines a data center as a single building. The plain and common meaning of the word single includes “unaccompanied by others” and “consisting of or having only one part, feature, or portion.” See Merriam-Webster Dictionary. The plain and common meaning of the word building is “a structure.” See Merriam-Webster Dictionary.

Although the expansion space will be physically connected to equipment located in the TAXPAYER Data Center via conduits, wires, access control system, a common power source and service drive, the expansion space and the TAXPAYER Data Center space do not constitute a “single building” as required by statute.

Construing Tax Code Section 151.359 to allow the expansion space to be considered part of the TAXPAYER Data Center as requested is contrary to the statute and fails to give any meaning to the term “single.”

Request: Any qualified jobs and capital investments that are created or made with respect to the expansion space during the five-year period following the effective date of the TAXPAYER Data Center’s certification as a qualifying data center will be attributed to the TAXPAYER Data Center for purposes of satisfying the requirements of Texas Tax Code Section 151.359(d)(2).

Response: A qualifying job is defined Tax Code Section 151.359(a)(5) and in Rule 3.335(a)(7) and consists of multiple elements. One of those elements is the requirement that the qualifying job be located in the same county in Texas as the associated qualifying data center. See Tax Code Section 151.359(d)(2)(A) and Rule 3.335(a)(7)(A)(ii). As a qualifying job is not dependent on it being located or housed at the associated qualifying data center, any qualifying jobs that are created and located in the same county as the TAXPAYER Data Center count towards satisfying the job creation requirement under Tax Code Section 151.359(d)(2).

Capital investment is defined in Rule 3.335(a)(1) and includes capital or fixed assets purchased for use in the operation of a qualifying data center. The qualifying data center is the facility certified as meeting each of the requirements, including the single building requirement, in subsection (d) of Rule 3.335. See Rule 3.335(a)(6).

Since the expansion space is not within the single building which was certified as the qualifying data center and does not become part of the qualifying data center, any capital investment related to the expansion space is not attributable to the TAXPAYER Data Center for purposes of satisfying the capital investment requirement under Tax Code Section 151.359(d)(2).

Request: Any qualifying tangible personal property or electricity purchased for installation at, incorporation into, or use in the expansion space will be exempt from sales and use tax under Texas Tax Code Section 151.359(b).

Response: The exemption applies to tangible personal property purchased for installation at, incorporation into, or use in a qualifying data center. See Tax Code Section 151.359(b) and Rule 3.3365(b)(1). Since the expansion space is not within the single building which was certified as the qualifying data center and does not become part of the qualifying data center, any tangible personal property purchased for installation at, incorporation into, or use in the expansion space would not be attributable to the TAXPAYER Data Center and is therefore, not exempt from sales and use tax under Tax Code Section 151.359(b).

Additionally, since the expansion space does not become part of the qualifying data center, electricity purchased for the expansion space is not exempt. If the expansion space and the existing qualifying data center space use an integrated electricity source, a predominant use study is required to differentiate between taxable and nontaxable uses of electricity from a single meter. See Rule 3.335(b)(1)(A) and Rule 3.295 relating to natural gas and electricity for more information on predominant use. If you have questions about this private letter ruling, please submit an email to us through our website at https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling #142740466.

Sincerely,

Tax Policy Division