Sales Tax on Installed Data Center Cooling and Power Equipment

Do contractors pay sales tax on materials, or charge it?

A contractor who builds cooling or power equipment into a data center usually pays sales or use tax on what its materials cost and charges the owner no tax. The exceptions decide most bids: a Texas separated contract, California fixtures and machinery, and equipment that stays movable all make you the seller.

Mixed new-build and retrofit work, equipment you fabricate yourself, and an owner's data center exemption all need judgment. Gather the contract, change orders, bill of materials, supplier invoices and the owner's exemption documents. Check any other state before you bid.

Is our cooling or power equipment part of the building, or movable equipment?

Each state decides by how the item is attached and what it does, and close cases are the state's call. No state names coolant distribution units (CDUs), rear-door heat exchangers, in-row or rack UPS, or busway, so compare each item to the lists below.

• Texas. "Incorporated materials" become real property and are necessary to the building's intended use (Rule 3.291(a)(7)). A furnish-and-install job is a sale of movable property when the item is not essential to the building and is readily removable without substantial damage ((a)(11)).
• California. Regulation 1521 sorts items into three lists. Materials (Appendix A) include conduit, electric wiring, piping and ducts. Fixtures (Appendix B) include transformers and switchgear, air conditioning and refrigeration units, and affixed generators. Cooling towers, other than small prefabricated units, are not machinery and equipment (Appendix C).
• Virginia. Any work "with respect to real estate or fixtures thereon" makes you a contractor (Code 58.1-610(A)).

Piping and manifolds plumbed into the building look like materials; a switchgear lineup bolted to the slab is a California fixture; a rack UPS that unbolts and rolls out may be movable. Record how each item is attached.

Lump-sum or separated contract: which one makes us charge tax in Texas?

A Texas separated contract makes you the seller of materials; a lump-sum contract makes you the consumer (Tax Code 151.056).

• Lump-sum. You pay tax on all materials and collect none from the owner. Invoices that split materials and labor do not make it separated unless the contract requires them (Rule 3.291(a)(8)).
• Separated. The contract states a materials price and a labor price. Cost-plus with labor stated separately counts. You need a Texas sales tax permit, may buy materials on a resale certificate, and collect state and local tax by job site on the greater of the agreed materials price or your cost ((b)(4), (b)(10)(A)).
• The contract controls. It overrides the bid, and change orders follow the contract's type ((b)(5)).

Is installation labor taxable in Texas on new construction, and why is a retrofit different?

Labor on new commercial construction is not taxed in Texas; remodeling is. Converting an existing air-cooled hall to liquid cooling is remodeling nonresidential real property, so tax applies to the whole charge, labor included, under lump-sum and separated contracts alike (Rule 3.357(b)(2)). You may buy the materials you build in on a resale certificate, since tax is collected on your full charge; tools and supplies you use up stay taxable when you buy them ((e)(1), (b)(4)).

• New usable square footage, and the first finish-out before anyone uses it, is new construction ((a)(8)).
• Work after the initial finish-out is remodeling even if the hall was never occupied ((a)(11)).
• In a contract mixing both, remodeling of 5.0% or less of a lump-sum charge is not taxed; above that, state the remodel and new-construction charges separately or the whole contract is presumed taxable ((b)(3), (b)(7)).
• Scheduled, periodic maintenance that builds in parts follows the contractor rule instead ((c)(1)).

The Comptroller's data center page lists nonresidential repair or remodeling as nonqualifying, so the owner's exemption does not cover a retrofit charge.

How does California tax contractors on materials, fixtures and machinery?

California taxes you differently for each list, mostly whatever the contract type.

You are a retailer of materials if the contract passes title before installation and states the materials price (Regulation 1521(b)(2)(A)), or if a time and material contract bills the customer sales tax on materials (Publication 9). If you make a fixture yourself, its cost price is your price to other contractors for similar fixtures; failing that, your price lists or bid sheets; failing that, materials, labor, factory costs and overhead plus a 5% profit ((b)(2)(B)). With a seller's permit you may buy fixtures and machinery on a resale certificate, but not materials. Taking a resale certificate from the general contractor does not shift your tax on materials or fixtures ((b)(6)(A)).

How does Virginia tax contractors and fabricators who install what they make?

Virginia treats every contractor as the consumer of property built into real estate; you pass no tax on as tax (23VAC10-210-410(A)).

• Mainly fabricate for your own contracts: pay tax on your raw materials (410(D)).
• Mainly sell to others: collect tax on sales; withdrawals for your own contracts are taxed on fabricated cost price, meaning materials, labor and overhead in work in process (410(E)).
• Sell and install movable equipment: charge tax; installation is not taxed if separately stated (410(H)).

Does the owner's Texas data center exemption reach our purchases?

Only when the qualifying owner, operator or occupant is the buyer. The exemption covers cooling and electrical systems and the mechanical, electrical and plumbing systems that run them, but only if "purchased ... by a qualifying owner, qualifying operator, or qualifying occupant" (Tax Code 151.359(b); Rule 3.335(b)(2); letter 201408938L).

• Lump-sum: you are the buyer and consumer, so the owner's Form 01-929 cannot cover your materials. Rule 3.300(i) says the same for the manufacturing exemption (Rule 3.300). No Comptroller document says it for data centers in one sentence; this is how the rules combine, so confirm with the Comptroller before pricing a bid.
• Separated: the owner buys the materials from you and may give you Form 01-929, the only proof the Comptroller accepts. For a qualifying data center it removes only the 6.25% state tax; you still collect local tax, up to 2%. The large-project box covers state and local tax. If your customer is the general contractor, not the owner, the general contractor is the buyer, so the exemption can only pass through its own separated contract with the owner.
• Exemption periods: 10 or 15 years for a qualifying data center; 20 years for a qualifying large project.
• Timing: purchases before the data center is certified are not eligible for refund (Decision 202604012H).

Can we use the data center's Virginia exemption certificate (Form ST-11A)?

Usually, if the data center holds the Department's exemption letter and the property qualifies. A real property contractor claims the exemption by giving vendors Form ST-11A with a copy of the Department's exemption letter to the data center (P.D. 10-121).

• What qualifies: computer equipment and "enabling hardware, including chillers and backup generators," but not "general building improvements or other fixtures" (Code 58.1-609.3(18)). In P.D. 10-121, chillers, computer room air conditioners (CRACs), cooling towers, power distribution and batteries serving the computer room qualified; fire and burglar alarms did not.
• Shared loads: switchgear that also feeds lighting, fire suppression or alarms is prorated by use (P.D. 13-183). Get the operator's load data.
• Delivery: property need not ship straight to the data center (P.D. 23-92).
• Timing: a certificate obtained after the sale draws "greater scrutiny," and a self-executed ST-11A that lacked key information and was not issued by the Department was invalid (P.D. 19-64). Confirm with Virginia Tax which certificate to present, and collect it before you invoice.
• End date: June 30, 2035, unless the subdivision 19 extension applies.
• Washington instead: its data center exemption covers "eligible power infrastructure" with its installation labor, not substations, and names no cooling equipment (RCW 82.08.986).

We make the equipment in another state or abroad: what use tax do we owe where we install it?

When you are the consumer, you owe use tax where the equipment is installed on anything bought without that state's tax, whether it ships from another state or another country.

• Texas lump-sum: accrue state use tax, plus local use tax at the job site, on materials shipped in from outside Texas (Rule 3.291(b)(3)(A), (b)(10)(B)).
• California: a contractor without a seller's permit that buys more than $10,000 a year of items subject to use tax registers as a "qualified purchaser" and files and pays by April 15 for the prior calendar year (R&TC 6225; Publication 9).
• Virginia: tax your supplier did not collect goes on Form ST-7, Consumer's Use Tax Return (410(D)).

Credit for tax paid to another state is covered in sales tax on GPU servers you buy. Two points have no published answer: the Texas use tax base when you build CDUs or switchgear in your own plant and install them under a lump-sum contract, and whether Virginia's exemption reaches a fabricator-contractor's withdrawal from its own inventory. Ask the state.

Do subcontractors charge sales tax to the general contractor?

It depends on the state and on each subcontract.

• Texas: each subcontract governs. A subcontractor on a separated contract collects tax from the general contractor, even under a lump-sum prime contract (Rule 3.291(b)(6)).
• California: a subcontractor furnishing fixtures is their retailer; on materials it owes tax as consumer.
• Virginia: no; every subcontractor is a consumer.
• Washington: the prime contractor collects retail sales tax; subcontractors report business and occupation tax as wholesalers (WAC 458-20-170).

Which contract terms and records decide the answer in an audit?

The signed contract decides; invoices do not. Keep:

1. The contract stating lump-sum or separated prices, and when title passes.
2. Change orders, each priced the same way as the contract.
3. A bill of materials tagging each item as material, fixture or movable equipment.
4. Supplier invoices showing tax paid, and use tax accruals by job site.
5. Form 01-929 or Form ST-11A with the exemption letter, dated before the sale.
6. Load data for prorated switchgear, and certification dates.

Unpaid tax can become personal. In Texas, an individual who controls collecting or paying tax collected and willfully fails to pay it owes it, even after the company dissolves (Tax Code 111.016(b)). In Virginia, an officer, member, manager or employee with the duty and authority to pay any tax who willfully fails owes a penalty equal to it (Code 58.1-1813). In California, once the business ends, a person responsible for paying who willfully failed owes tax collected from customers or owed on materials consumed (R&TC 6829).

Sales or use tax you pay on materials is a contract cost for income tax; see long-term contracts for custom equipment and Texas franchise tax deductions. Contract wording is your lawyer's; data center certification and Virginia economic development memorandums belong to the owner.

How does Canada treat the same work?

For other provinces, see provincial sales tax.

Example

US dollars, round and illustrative. Everything named is built into the building.

New data hall near Dallas

A liquid cooling startup signs a $10,000,000 supply-and-install contract for CDUs, manifolds and secondary-loop piping in a new hall at a certified qualifying data center (8.25%: 6.25% state, 2% local). Materials cost $6,000,000 from out-of-state suppliers with no Texas tax.

• Lump-sum: use tax of $495,000 ($375,000 state, $120,000 local). It charges the owner nothing, and on the purchaser test above the owner's Form 01-929 would not cover its materials.
• Separated ($7,000,000 materials, $3,000,000 labor): it buys on a resale certificate, takes the owner's Form 01-929 and collects only local tax, $140,000. Labor is not taxed.
• Large-project box checked: $0.

Retrofit of an air-cooled hall in Texas

The same startup converts an existing hall at another Texas site for $2,000,000 ($1,200,000 materials, $800,000 labor). It is remodeling: the startup buys the $1,200,000 of materials on a resale certificate and collects 8.25% on the whole $2,000,000, which is $165,000, under either contract type, and Form 01-929 does not cover it.

Switchgear and UPS in Loudoun County

A maker sells $2,000,000 of switchgear and $1,000,000 of UPS to the general contractor building a qualifying data center (6%). Without a valid ST-11A at the sale, tax is $180,000. With Form ST-11A and the Department's letter, the UPS serving the computer load is exempt; if 10% of the switchgear's load feeds lighting and fire systems, tax is $12,000. If the maker installs the equipment itself and mainly sells to others, it becomes the consumer and owes tax on fabricated cost price: $1,800,000 of cost means $108,000 before any exemption.

Different for you?

• Servers, network gear, rack integration, drop shipments or movable installs: sales tax on servers, installation and maintenance.
• Income timing on a multi-year build: long-term contracts for custom equipment.
• Washington business and occupation (B&O) tax, Ohio CAT or Oregon CAT on contract receipts: gross receipts taxes in other states.
• Use tax never paid, or tax never collected on separated contracts: catching up on uncollected sales tax.
• Permits in a new state: when you must collect sales tax, or foreign sellers and sales tax for a foreign maker; return schedules: filing sales tax returns.
• Imported CDUs, switchgear or UPS: tariffs and duties on imported equipment.
• Crews in other states: business income tax in other states and Ohio city income tax for traveling crews.
• Installing in a Canadian data centre: provincial sales tax and GST/HST for non-resident sellers.
• Several states, a retrofit or a fabricated product: our data center tax services. Our CPAs register you, file sales and use tax returns in each state, and set up job-cost books that keep materials, fixtures and labor apart.