Qualified Data Center Purchases Now Eligible for Massachusetts Sales and Use Tax Exemption

As part of a broad economic development bill recently passed by the Massachusetts Legislature and signed into law by Governor Maura Healey, the owner or operator of a qualified data center may now apply for a sales tax exemption covering 100% of all purchases of computers and other equipment supporting the data center’s computing, networking, data processing, and data storage functions. If the data center is certified, the exemption also extends to computer software and electricity purchased for use or consumption in the data center, as well as building and construction costs.

Chapter 238 of the Acts of 2024 took effect upon Governor Healey’s signature on November 20, 2024. With the enactment of the exemption, Massachusetts joined a number of other US states offering tax incentives for data centers.  

Qualified Data Centers

A qualified data center may house computer equipment, networking, data processing, and/or data storage. It must have three characteristics: (1) uninterruptible power supplies and/or generator backup power, (2) sophisticated fire suppression and prevention systems, and (3) enhanced security. “Enhanced security” requires restricting access to the facility to selected personnel, permanent security guards, video camera surveillance, an electronic system requiring passcodes, key cards or biometric scans, or similar security features.

To qualify for the sales and use tax exemption, a data center must also satisfy the following conditions:

• Be located in Massachusetts
• Be operated by the owner or lessor of the data center or a person or entity under common ownership with the owner or lessor
• Include at least 100,000 square feet of space in one or more data center buildings located on a single parcel or contiguous parcels
• Cost at least $50 million to construct (or substantially refurbish) and equip (qualifying costs include those for land, land development, site improvement, site utility infrastructure, construction, and eligible data center equipment, and must be incurred in the 10-year period after the certification as a qualified data center becomes effective)
• Maintain at least 100 jobs in Massachusetts

A qualified data center may be either newly constructed or substantially refurbished. A substantially refurbished center means a rebuild, modification, or construction of at least 100,000 square feet of an existing facility that meets the $50 million cost threshold.

WHAT PURCHASES ARE EXEMPT?

If the owner or operator of a data center applies for and receives certification as a qualified data center, then the following purchases will be exempt from Massachusetts sales and use taxes for a 20-year period beginning on the effective date of the certification:

• Eligible data center equipment, consisting of computers and equipment supporting computing, networking, data processing, and data storage, including, but not limited to:
  • Servers, routers, networking equipment, racks and chassis, trays, cables and other connectors, conduits, and other enabling machinery, equipment, and hardware
  • Component parts, replacement parts, and upgrades of equipment
  • Cooling systems, cooling towers, mechanical equipment, HVAC equipment, and other temperature control infrastructure
  • Power infrastructure for the transformation, generation, distribution, or management of electricity used for operations and maintenance
  • Monitoring and security equipment
  • Water conservation systems
  • Modular equipment and preassembled components and components used in manufacturing a modular data center
  • Any other personal property or equipment used or consumed in the operation and maintenance of the qualified data center
• Computer software, including software purchased, leased, utilized, or loaded at a qualified data center, whether prewritten or customized
• Electricity for use or consumption in the operation of a qualified data center
• Construction costs incurred for the construction, renovation, or refurbishment of a qualified data center, including the costs of materials, labor, services, and equipment purchased or leased to construct a qualified data center facility

How to Apply for the Certification

In order to qualify for the tax exemption, a facility must be certified as a qualified data center by the Massachusetts secretary of the Executive Office of Economic Development (the Secretary). The owner or operator of the data center may apply for certification by submitting an application on a form to be prescribed by the commissioner of the Massachusetts Department of Revenue (the Commissioner). If approved, the certification takes effect on the date the application is submitted or on a prospective date requested in the application (no more than five years after the application date).

The Secretary will certify an applicant’s data center as a qualified data center or will deny the certification application within 60 days after receiving a completed application. If the Secretary fails to act on the application within such 60-day period, then the application is deemed to be approved, and the Secretary is required to issue a certification within 14 days.

Certifications will indicate the beginning and ending dates of the sales tax exemption, and for a qualified data center including more than one building, the statute contemplates that different effective dates (and therefore different 20-year exemption periods) may be provided for different buildings. A certification remains valid for the entire exemption period, notwithstanding a change in ownership of the qualified data center.

When Can a Certification Be Revoked?

The Secretary may revoke the certification of a qualified data center if, after an investigation in consultation with the Department of Revenue, the Secretary issues a written determination that the data center is in “material noncompliance” because it has failed to substantially achieve the investment and jobs requirements. It appears that the statute is referring to a failure to substantially achieve the minimum statutory requirements of at least $50 million of construction and equipment costs incurred in the 10 years after the certification becomes effective and at least 100 jobs maintained over 10 years of operation of the data center, even though the certification application for the data center may have projected figures that were higher than those statutory minimums. The revocation is effective “on the first day of the tax year” in which the determination is made, and as of that date, the Commissioner is to disallow the exemption.

It is unclear whether this provision is intended to impose a new tax on prior exempt purchases, or simply to deny an exemption for purchases made after the revocation takes effect. It is also unclear how the “first day of the tax year” reference will be applied, given that sales and use taxes are typically assessed and collected on a monthly rather than annual basis.

The Secretary and the Commissioner are required to review each certification after 10 years. In order to facilitate this review, a report must be filed with the Secretary and the Commissioner with respect to each qualified data center, prior to the end of the 10^th year of the qualification period, detailing whether the data center has “met the investment requirements” for the exemption. Presumably that language refers to the minimum investment of at least $50 million in construction and equipment costs within such 10-year period. Guidance will be necessary to clarify what party is required to file the report (e.g., the person who originally applied for the certificate or a current owner or operator). It seems likely that guidance will also require that the report include information relevant to the job maintenance requirement.

Effective Date and Other Issues

When a qualified data center certification is approved, it takes effect, and qualified purchases become eligible for exemption, on the date the application was submitted or on a prospective effective date requested in the application, which must be no more than five years after the application date. Unless it is practical to apply for certification at least 75 days prior to making qualified purchases, it is therefore possible that a taxpayer may make purchases eligible for the exemption between the effective date and the taxpayer’s actual receipt of certification, and vendors may collect sales or use tax on those purchases.

While it is possible to apply for an abatement and refund of the over-collected taxes, barring administrative or regulatory relief, such an application will need to be made by the vendor. Taxpayers in this situation may wish to make advance arrangements with major vendors to facilitate this process.

As of the publication of this LawFlash, the Commissioner has not promulgated the form that will be used to apply for certification as a qualified data center. The Executive Office of Economic Development has stated that it will not accept applications until a standardized application form is available.