Did switchgear powering a qualifying Virginia data center count as exempt enabling hardware?

Plain-English summary

Virginia ruled that switchgear distributing electricity to exempt data-center computers was qualifying enabling hardware. The contractor supplied Form ST-11A and a Department letter showing that the data-center operator qualified for the statutory exemption.

The switchgear took utility power and distributed it through uninterrupted power sources to servers, routers, and other computer equipment. Virginia concluded that this function supplied the means for exempt equipment to operate, bringing the switchgear within the exemption in whole or in part.

The exemption did not cover general building improvements, fixtures, or property unrelated to data processing, storage, retrieval, or communication. If the switchgear also powered lighting, alarms, fire suppression, or other taxable systems, tax had to be prorated. The contractor was directed to obtain power-usage information from the operator to calculate the exempt and taxable shares.

What this means for you

• Power-distribution equipment can qualify as data-center enabling hardware when it operates exempt computer equipment.
• A qualifying data center and proper exemption documentation remain threshold requirements.
• Mixed-use switchgear is not automatically 100% exempt.
• Map the downstream equipment and retain power-usage data supporting the exempt percentage.
• Building systems with no data-processing function remain taxable under this ruling.

Common questions

Q: Was switchgear specifically named in the statute?
A: No. Virginia treated it as enabling hardware because it supplied power needed by exempt servers, routers, and related equipment.

Q: Could all switchgear tax be removed?
A: Only if the equipment powered exempt uses exclusively. Mixed taxable and exempt use required proration.

Q: What were examples of taxable uses?
A: The ruling identified lighting, fire and security alarms, fire suppression, and other systems unrelated to processing, storing, retrieving, or communicating data.

Q: What records supported proration?
A: The ruling suggested obtaining the switchgear's power-usage information from the data-center operator.

Citations and references

• Va. Code § 58.1-609.3 (18).
• Virginia Form ST-11A and the data-center exemption certification letter described in the ruling.
• Virginia Public Document 10-121, cited for the data-center exemption policy.

Subject

Out-of-state dealer and registered to collect the Virginia use tax.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-183

Original ruling text

October 18, 2013

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your request for a ruling on the application of the retail sales and use tax to switchgear equipment sold by * (the "Taxpayer") to ***(the "Contractor).

FACTS

The Taxpayer is an out-of-state dealer and registered to collect the Virginia use tax. The Taxpayer collected the Virginia use tax from the Contractor on sales of switchgear equipment made to the Contractor in 2011 and 2012 for which the Contractor installed at a Virginia data center operated by * (the "Operator"). The

Taxpayer's invoices indicate that the switchgear equipment was shipped to such data center.

In addition, the Contractor furnishes an exemption certificate, Form ST-11A, claiming the exemption under Va. Code § 58.1-609.3 (18). The Contractor also furnishes a data center exemption certificate letter issued by the Department indicating that the Operator qualifies for the cited exemption. The Contractor indicates that the switchgear equipment provides power to the data center. For example, the utility brings power to the building and is connected to the switchgear, which distributes the power to the uninterruptible power sources that send power to the data center. The Taxpayer requests a ruling as to whether the exemption applies to the switchgear equipment.

RULING

Virginia Code § 58.1-609.3 (18) provides an exemption from the retail sales and use tax for the following:

Beginning July 1, 2010, and ending June 30, 2020, computer equipment or enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware, including chillers and backup generators used or to be used in the operation of the equipment exempted in this paragraph , provided that such computer equipment or enabling software is purchased or leased for use in a data center that (i) is located in a Virginia locality, (ii) results in a new capital investment on or after January 1, 2009, of at least $150 million, and (iii) results in the creation on or after July 1, 2009, of at least 50 new jobs by the data center operator and the tenants of the data center, collectively, associated with the operation or maintenance of the data center provided that such jobs pay at least one and one-half times the prevailing average wage in that locality. The requirement of at least 50 new jobs is reduced to 25 new jobs if the data center is located in a locality that has an unemployment rate for the preceding year of at least 150 percent of the average statewide unemployment rate for such year as determined by the Virginia Economic Development Partnership or is located in an enterprise zone. This exemption applies to the data center operator and the tenants of the data center if they collectively meet the requirements listed in this section. Prior to claiming such exemption, any qualifying person claiming the exemption, including a data center operator on behalf of itself and its tenants, must enter into a memorandum of understanding with the Virginia Economic Development Partnership Authority that at a minimum provides the details for determining the amount of capital investment made and the number of new jobs created, the timeline for achieving the capital investment and new job goals, the repayment obligations should those goals not be achieved, and any conditions under which repayment by the qualifying data center or data center tenant claiming the exemption may be required. In addition, the exemption shall apply to any such computer equipment or enabling software purchased or leased to upgrade, supplement, or replace computer equipment or enabling software purchased or leased in the initial investment. The exemption shall not apply to any other computer software otherwise taxable under Chapter 6 of Title 58.1 that is sold or leased separately from the computer equipment, nor shall it apply to general building improvements or other fixtures. [Emphasis added.]

As noted above, the exemption applies to enabling hardware, such as "chillers and backup generators used or to be used in the operation of the equipment exempted" in the above statute. While the term "enabling hardware" is not defined by the Virginia Retail Sales and Use Tax Act, the common meaning of the term "enable" is "[t]o supply with the means, knowledge, or opportunity to be or do something." The American Heritage Dictionary, Second College Edition, page 450 (1982). By distributing power to the data center, the switchgear equipment supplies the means of operation for servers, routers and other computer equipment used in an exempt manner in the data center. Accordingly, I conclude that the switchgear equipment is enabling hardware that qualifies for exemption from the retail sales and use tax either in whole or in part, as further explained below.

The above exemption does not exempt general building improvements or fixtures. Nor does it exempt tangible personal property that has no bearing on the processing, storage, retrieval, or communication of data in a data center. Thus, when enabling hardware is used in both taxable and exempt activities, the tax on it must be prorated. For example, switchgear equipment may be used to power exempt equipment ( e.g. , computer equipment used in the processing, storage, retrieval, or communication of data) and taxable equipment ( e.g. , lighting equipment, fire and security alarm systems, fire suppression systems, and other equipment that provides no processing, storage, retrieval, or communication of data in the data center or does not constitute enabling hardware). In such instances, the tax due on the item is prorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner. The Contractor may be able to determine whether or not the switchgear equipment at issue is used to power the entire facility or only exempt equipment. If such equipment is used to power both exempt and taxable equipment, then the Contractor should obtain power usage information of the switchgear equipment from the data center operator to determine the appropriate percentage of exempt versus taxable usage to apply in this instance.

The foregoing is consistent with the data center exemption policy set out in Public Document 10-121 (6/29/10).

CONCLUSION

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, please contact * in the Department's Office

of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5421183330.R