Tax Type
Retail Sales and Use Tax
Description
Out-of-state dealer and registered to collect the Virginia use tax.
Topic
Exemptions
Tangible Personal Property
Date Issued
10-18-2013
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:
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- 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 *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5421183330.R
Rulings of the Tax Commissioner