Maryland enacts data center sales tax exemption
INSIGHT ARTICLE |
On May 8, 2020, Maryland Gov. Larry Hogan allowed Senate Bill 397 to become law without his signature. The bill creates a new exemption from the state’s sales and use tax for the sale of qualified personal property to qualified data centers. The exemption becomes effective on July 1, 2020.
To qualify for the exemption, taxpayers must file an application with the Maryland Department of Assessments and Taxation showing that the taxpayer intends to meet the requirements to be a qualified data center. For purposes of the exemption, a data center is used to house computer systems, computer storage equipment, and associated infrastructure that businesses or other organizations use to organize, process, store, and disseminate large amounts of data. Qualified data center personal property includes computer equipment and software; heating, ventilation, and air conditioning equipment and systems; and equipment necessary to generate electricity.
Qualified data centers must be located in the state of Maryland and must hit target levels of investment in qualified personal property within three years of submitting an applications. The level of investment required depends on the location of the data center. Tier I areas (either a Tier I County under the Economic Development Article or an Opportunity Zone) require an investment of $2 million, while all other areas require an investment of $5 million. In addition to qualified personal property investments, there is also a requirement to create at least five qualified positions. Qualified positions include a filled full-time position with pay at least 150% of the state minimum wage. The positions must be newly created in response to starting a data center or expanding in a single location.
The data center exemption only applies in transactions where the qualified data center can provide its vendor with evidence of its eligibility for the exemption provided by the state. Once the state has issued the certificate of eligibility to the taxpayer, the taxpayer must renew it each year, up to a maximum of 10 years. However, if the qualified taxpayer can show they have invested at least $250 million in qualified property, they can extend the renewal period for the certificate to 20 years.
The creation of the data centers exemption brings Maryland into line with its neighbor on sales tax policy. Virginia has a similar exemption for data and information services. Beginning in 2010, Virginia law provides that the sale or lease of qualified equipment to data centers is exempt from tax. However, the investment requirements for the exemption are significant- the purchases must result in a new capital investment of at least $150 million and generally must result in the creation of at least 50 new jobs.
The District of Columbia had a similar sales tax exemption for sales made to qualified high technology companies, but the district repealed the exemption beginning in 2020.
Taxpayers operating in data and information services should consider applying for the new Maryland exemption. As the sales tax exemption no longer applies in the District of Columbia, taxpayers may consider relocating to closely neighboring areas in Maryland or Virginia that can offer more favorable tax treatment on investments in qualified personal property.