Data Center Tax Strategies and Considerations

Benefits of Advance Tax and Risk Planning

Demand for data center capacity is experiencing unprecedented growth. It is estimated that global data center infrastructure could more than triple by 2030, with AI-ready workloads leading the charge. Both incumbents and new developers are rushing to meet this growing need.

Before investing, companies should consider the benefits and risks associated with a particular location. These include not only the features of the site itself, but the availability of negotiated or existing tax incentives that can significantly reduce construction and operational costs. Kroll can assist in optimizing the outcome through its highly experienced professionals who have long-standing relationships with state and local tax authorities.

Our highly successful and time-tested approach applies a data-driven model; evaluating grid strength, pricing trends, fiber density and labor markets using location quotient and wage benchmarks to identify sustainable talent pipelines. Sales and property taxes on materials and equipment can significantly impact capital and operating costs. We help clients identify jurisdictions where these exposures can be reduced through exemptions, abatements, and other tax incentives. These financial levers often become the deciding factor, and we ensure they are fully integrated into the site selection process.

Read on for further details.

Negotiated Incentives

Colocation: Managing record levels of power density and cooling needed for the continuous operation of servers and other infrastructure is key to a data center’s bottom line. Accordingly, power availability and reliability are critical, and many data centers have begun colocating with renewable energy generators to mitigate reliance on traditional power grids. This “behind the meter” or “bring your own power” strategy is not permitted in many states, so a jurisdiction's energy policy should be considered when identifying the best place to locate. Kroll’s experts can help with these negotiations.

Utility Incentives: Utility incentives represent a powerful but often underleveraged tool in enhancing the financial performance of large-scale data center projects.

Many utilities offer structured programs, including custom tariffs, infrastructure credits and energy efficiency rebates that can be negotiated as part of a broader incentive strategy. Leading utilities such as Georgia Power, Dominion Energy and Duke Energy have implemented data center-specific programs that reward high-load users with reduced transmission charges, rebates for advanced IT and cooling systems and favorable time-of-use rates. Kroll helps clients go beyond basic eligibility to negotiate bespoke power contracts and layered incentive structures that align with long-term operational goals.

Tax Planning

Most data center investments qualify for exemptions that can significantly offset both initial development and ongoing operating costs.

Sales Tax: Depending on the level of investment, many states allow qualified data centers to make tax-free purchases of construction materials as well as critical infrastructure equipment such as computers, generators, air handling units, cooling towers and more. These exemptions can apply for up to 20 years or more, making them extremely valuable.

Securing these exemptions can be challenging. Each state’s exemption covers different types of property and services. Companies must apply for the exemption and commit to meeting specific financial investment, wage and job creation thresholds over a specific period. These commitments are periodically tested to ensure compliance with state laws.

Companies will also need to apply for and obtain tax exemption certificates to make tax-free purchases. Thorough tax research into what materials and equipment qualify for exemption in each state is a valuable tax compliance tool. Kroll’s team of experienced tax advisors can streamline the exemption application process and ensure maximum benefits while avoiding exemption clawbacks.

Property Tax: Administrative appeals of property tax assessments can yield a variety of savings. Facility owners may provide useful life studies or cost segregation studies to identify the company’s real and personal property, resulting in depreciation deductions on shorter-lived components, alternative valuation methodologies or reduced assessments.

Server owners may be able to deduct soft costs related to intangible items such as software, labor and warranties. Kroll studies show that unbundling these components from the price of capitalized equipment can save as much as 10%-30% of tax owed.

Federal and State Income Tax: Companies may take advantage of federal accelerated depreciation and may also benefit from bonus depreciation, which can lead to cash tax benefits by reducing taxable income in the early years of the investment. Various credits and incentives, such as R&D tax credits for developing innovative technologies, may also apply. The New Markets Tax Credit (NMTC) may be available for projects located in qualifying low-income communities.

At the state level, income tax credits may be available when meeting specific criteria such as job creation or energy efficiency. These benefits vary by jurisdiction and require careful compliance and documentation.

Investment in a data center can also impact a company’s apportionment. Given the variations in state rules, it is beneficial to analyze the impacts that such an investment could have on the company’s overall state taxes.

Recent legislation signed by the President contains several key provisions impacting companies investing in data centers, including full expensing of domestic research and experimental expenditures and certain business property, modification of the limitation on business interest, a special depreciation allowance for qualified production property, increased dollar limits for expensing of certain depreciable assets and modifications to various energy credits. Kroll can help evaluate how these provisions impact companies and their state and local taxes.

Pollution Control Equipment: In addition, many states including Ohio, New York and Texas offer income, sales, and/or property tax exemptions for certified pollution control equipment. Kroll’s team of engineers and appraisal professionals can review the site design to ensure certification and availability of these exemptions.

Security and Risk Management

Companies must anticipate, respond to and mitigate a myriad of enterprise-wide security challenges. Since data centers are crucial for business continuity, the site selection process should also include a strategic risk assessment to people, property and information at a potential site. Kroll’s Enterprise Security Risk Management Team can help with strategy development with threat and risk assessments to mitigate real-world exposure to physical harm in a proactive way.

Timing is Everything

Incentives negotiation and tax savings analyses should begin before land is acquired and while there are still multiple states in consideration for the project. Conducting a proper negotiation correlates directly to success in securing incentives and delivering a larger value proposition for the project. In some states, such as Texas, each and every taxing jurisdiction must consider and approve a request for tax abatements and exemptions. Certification efforts should be started as early as possible, as governmental authorities may take months to complete their review and certification. Failure to plan could result in lost or diminished tax benefits directly affecting the ROI of the project.

Kroll’s Turnkey Solution

The best way to obtain a holistic view of the tax benefits and security risks in a particular location is to conduct an integrated analysis of the available incentives to ensure tax benefits are maximized, liabilities are correctly estimated and minimized and ongoing compliance is adequately addressed.

Kroll is well positioned to assist you throughout this entire process. Our firm possesses thorough knowledge of state and local requirements and maintains established relationships with tax jurisdictions based on trust and credibility.