Texas Comptroller Issues Private Letter Ruling to Data Center

November 13, 2019

The Texas Comptroller recently issued a Private Letter Ruling about Texas Tax Code Section 151.3959’s temporary exemption from sales and use tax for large qualified data centers.

In the ruling, a company (“Taxpayer”) who owned, operated, and occupied a large data center planned to expand its operations by constructing at least one, but possibly two, new buildings. Taxpayer’s data center enjoyed the sales and use tax exemptions afforded by Section 151.3959. Taxpayer wanted the exemption to apply to its new buildings.

To acquire property for the expansion, Taxpayer entered into a Sale/Leaseback arrangement with a seller under which Taxpayer would be recorded in the real property records of its Texas county as the owner of the new buildings; the seller would, after the Sale/Leaseback, be reported as the owner for federal income tax purposes. Importantly, Taxpayer would ultimately pay an amount equaling a fair rental value, not a purchase price.

The Comptroller ruled that Section 151.3959’s sales and use tax exemption may only extend to an expansion of a data center if the taxpayer’s ownership interest is the same for both the original data center and the expansion. The Comptroller then looked to the economic substance of the Sale/Leaseback arrangement to find that Taxpayer was the owner of the data center but would only be the lessee of the expansion.

Because Taxpayer’s ownership interest in the data center and the expansion were not identical, the data center’s sales and tax exemption could not extend to the new buildings.

This Ruling is important for data centers to note as they consider how to structure expansions.

The decision is Private Letter Ruling No. 20181217152342.

For more information, contact:

Doug Sigel
Practice Group Leader, Sales & Use and Income Tax
512-459-6611
doug.sigel@ryanlawyers.com