Can a certified large data center project in Texas be expanded to add a building on land sold to an affiliated company, and can that affiliate also become a tax-exempt qualifying owner?

Plain-English summary

The Texas Comptroller ruled that a certified large data center project can grow onto an adjoining lot even after that lot is sold to an affiliated company, and that the affiliate can be added as a second tax-exempt "qualifying owner" of the same project.

The taxpayer's data center project (Lot A) was already certified for the § 151.3595 large-data-center sales tax exemption — a temporary (20-year) exemption for computer hardware/software, electrical systems, cooling systems, and electricity necessary to the project, available to businesses that certify at least 40 new jobs, $500 million of capital investment over five years, and 20 megawatts of contracted transmission capacity. The taxpayer wanted to sell the neighboring, boundary-sharing Lot B to a commonly-owned affiliate, who would build and own the new buildings there, with the same tenant occupying both lots.

The law requires a qualifying project to sit on a single parcel or on contiguous parcels that are either commonly owned or "owned by affiliation" with the qualifying operator. Because the taxpayer stayed the qualifying operator of the whole project (both lots) and the two lots shared a parcel boundary and a common corporate parent, the Comptroller found the affiliation and contiguity tests were both satisfied — the exemption could extend to the new Lot B buildings. And because the statute limits a project to one qualifying occupant but places no cap on the number of qualifying owners, the affiliate could be added as a second qualifying owner alongside the original taxpayer.

The catch: none of this happens automatically. The taxpayer has to file an amended certification application (Form AP-236) adding Lot B and the affiliate, get it certified by the Comptroller, and only then can the affiliate get a registration number and start making exempt purchases. The exemption clock doesn't restart — both owners' exemption still ends 20 years from the project's original certification date, and both remain on the hook for back taxes, penalty, and interest if the project's job/investment/electricity commitments aren't met and the registration numbers get revoked.

What this means for you

Large data center operators structuring multi-entity projects

If your certified project needs to expand onto land owned (or about to be owned) by a corporate affiliate, this ruling confirms the exemption can follow — provided the parcels are contiguous or share ownership by affiliation with the qualifying operator, and you keep a single qualifying occupant. But you must proactively amend your Form AP-236 certification; the exemption doesn't extend itself.

Corporate groups splitting data center campuses across sibling entities

Multiple affiliated entities can each be a "qualifying owner" of the same project as long as they're tied together by common ownership with the operator. This gives real estate and financing flexibility (e.g., separating land/building ownership from the operating entity) without losing the exemption — but every added owner takes on exposure if the project's certification requirements later aren't met.

Accountants and tax professionals

Track the distinction between "qualifying operator," "qualifying owner," and "qualifying occupant" in § 151.3595(a) — each has a different role and different limits (only one occupant, but owners and the operator can multiply). The 20-year exemption clock runs from original certification regardless of when an owner or building is later added.

Common questions

Q: Does selling part of a data center campus to an affiliate break the sales tax exemption?
A: Not necessarily. If the parcels remain contiguous and are commonly owned or owned by affiliation with the qualifying operator, and the operator stays the same, the project can be expanded to include the new owner's building.

Q: Can a large data center project have more than one qualifying owner?
A: Yes. Texas Tax Code § 151.3595 caps a project at one qualifying occupant but does not limit the number of qualifying owners.

Q: What does the affiliate need to do before it can buy exempt items for the data center?
A: The project's certification must be formally amended (Form AP-236) to add the new lot and the affiliate as a qualifying owner, and the Comptroller must certify the amendment and issue the affiliate a registration number, before any exempt purchases can be made.

Q: What happens if the expanded project later fails to meet its job, investment, or electricity requirements?
A: The Comptroller can revoke registration numbers, and each person whose number is revoked becomes liable for sales and use tax, penalty, and interest on the purchases for which they claimed the exemption.

Q: Can I rely on this ruling for my own data center project?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely for that taxpayer's facts and can't be relied on by others, though it illustrates how the Comptroller reads the contiguity/affiliation and multi-owner provisions of § 151.3595.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.3595(a)(2) (Large Data Center Project — definition, contiguity/affiliation requirement)
• Tex. Tax Code § 151.3595(a)(7) (Qualifying Owner — definition)
• Tex. Tax Code § 151.3595(b) (exempt property — hardware, software, electrical/cooling systems, electricity)
• Tex. Tax Code § 151.3595(d), (e) (certification requirements — jobs, capital investment, transmission capacity)
• Tex. Tax Code § 151.3595(f) (20-year exemption period from original certification)
• Tex. Tax Code § 151.3595(g) (registration numbers required for exempt purchases)
• Tex. Tax Code § 151.3595(h) (revocation and resulting tax liability)
• Form AP-236 (Texas Application for Certification as a Qualifying Large Data Center Project)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202308018L

Original ruling text

August 15, 2023

RE: Private Letter Ruling No. PLR20220824135310

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Aug. 22, 2022, and our response is based on information in that request letter as well as additional information provided by email on Dec. 9, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether a large data center project can be expanded to include a building on a lot that will be sold to an affiliate and whether that affiliate can be included as a qualifying owner of the project.

Facts Presented

The relevant facts are based on the request for Private Letter Ruling that includes a plat map and additional business entity formation documents provided by ** (Taxpayer).

Taxpayer is a Delaware LLC owned by COMPANY A (Parent). Taxpayer is the sole qualifying owner and qualifying operator of a large data center project located in Texas. Taxpayer entered into a lease with one qualifying occupant (Tenant) to operate in the data center.

Taxpayer applied to the Comptroller’s office and certified that it will construct a large data center project and that Taxpayer and Tenant, independently or jointly, will meet the job creation, capital investment, and electricity transmission capacity requirements for a project. The Comptroller’s office certified Taxpayer’s application and issued Taxpayer and Tenant registration numbers allowing them to claim the sales tax exemption for certain items that are necessary and essential to the operation of the project.

Taxpayer owns the lot on which the data center is located (Lot A). It also owns another lot that is next to the large data center project (Lot B). Lot A and Lot B share a boundary.

Taxpayer is proposing to sell Lot B to an affiliate, COMPANY B (Affiliate), which is also owned by Parent. Affiliate will build and own all future buildings on Lot B that Taxpayer intends to become part of the certified large data center project. Taxpayer will remain the qualifying operator of the large data center project, including the buildings on Lot A and Lot B. Tenant will remain the sole qualifying occupant of the building on Lot A and will also be the sole occupant of the proposed building on Lot B.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analysis.

Question One: Can Taxpayer’s certified large data center project be expanded to include the buildings on Lot B after that lot is sold to Affiliate?

Ruling One: Yes, Taxpayer's certified large data center project may be expanded to include the buildings on Lot B after the sale to of the lot to Affiliate.

Question Two: Can both Taxpayer and Affiliate be “qualifying owners” of the project that are eligible to make exempt purchases when Affiliate becomes the owner of Lot B?

Ruling Two: Yes. Both Taxpayer and Affiliate can be “qualifying owners” of the large data center project and will be eligible to make exempt purchases.

Analysis: Section 151.3595(a)(2) (Property Used in Certain Large Data Center Projects; Temporary Exemption), in relevant part, defines a “large data center project” as a project that is located in this state and is composed of one or more buildings comprising at least 250,000 square feet of space located on a single parcel of land or on contiguous parcels of land that are commonly owned or owned by affiliation with the qualifying operator.

Section 151.3595(a)(7) provides that a “qualifying owner” is a person who owns a building in which a qualifying large data center project is located. A qualifying owner may also be the qualifying operator.

A large data center project may claim a sales tax exemption on certain tangible personal property that is necessary and essential to the operation of the project. The exemption includes computer hardware and software, electrical systems, cooling systems, and electricity. Section 151.3595(b).

Under Sections 151.3595(d) and (e), a large data center project must apply to and be certified by the Comptroller’s office. A project must certify that it will:

create at least 40 jobs in the county in which the project is located;

make at least $500 million of capital investment in the project in the five-year period following the date of certification; and

agree to contract for at least 20 megawatts of transmission capacity for operation of the large data center project.

The exemption begins on the date the large data center project is certified by the Comptroller’s office and expires on the 20th anniversary of that date. Section 151.3595(f).

The Comptroller’s office will issue a registration number to each qualifying owner, operator, and occupant in the large data center project. This number must be included on a data center exemption certificate when making exempt purchases for the project. Section 151.3595(g).

Registration numbers will be revoked if it is determined that the project does not meet the job creation, capital investment, and electricity transmission capacity requirements. Each person who has a registration number revoked is liable for the amount of sales and use tax due, including penalty and interest from the date of purchase, on purchases the person claimed an exemption. Section 151.3595(h).

Taxpayer may expand its project to include the land and building on Lot B after the sale of the lot to Affiliate. Section 151.3595(a)(2) requires a large data center project to be located on a single parcel of land or on contiguous parcels that are commonly owned or owned by affiliation with the qualifying operator. Taxpayer provided a plat map that shows Lot A and Lot B share a common boundary and are contiguous. Taxpayer has also provided entity formation documents that substantiate that Parent is the sole owner of both Taxpayer and Affiliate. Parent’s ownership of both Taxpayer and Affiliate establish that Lot A (owned by Taxpayer) and Lot B (owned by Affiliate) will be owned by affiliation with the qualifying operator the project (Taxpayer). Therefore, the large data center project will meet the location and ownership requirements in Section 151.3595(a)(2).

Affiliate may also be included as a qualifying owner for Taxpayer’s large data center project. Section 151.3595(2) limits a large data center project to a single qualifying occupant. Section 151.3595 does not limit the number of qualifying owners for a project. Affiliate will own the buildings on Lot B which is contiguous to Lot A. Affiliate may therefore be included as a qualifying owner of the large data center project.

Taxpayer must file an amended application Form AP-236 (Texas Application for Certification as a Qualifying Large Data Center Project) to include Lot B in the project and Affiliate as a qualifying owner of the large data center. Taxpayer and Affiliate must certify that the project will meet all of the requirements of Section 151.3595 including the job creation, capital investment, and electricity transmission capacity requirements. The application must be certified by the Comptroller’s office and Affiliate must receive a registration number before it may claim an exemption under Section 151.3595(b). Taxpayer and Affiliate will be responsible for all sales and use tax due on purchases for which an exemption is claimed under Section 151.3595(b) if the registration numbers are revoked. The exemption period for Taxpayer and Affiliate will end 20 years from the date of original certification as provided in Section 151.3595(f).

The Texas Tax Code and Texas Administrative Code are accessible at: www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. PLR20220824135310.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.