Tech firm: State tax unfair for Web work
San Antonio-based rackspace cites margins tax in choice to build out-of-state data centers
A Texas-bred leader in cloud computing warned Wednesday that the state’s business tax is pushing its expansion — and perhaps the whole industry — elsewhere.
Rackspace Hosting Inc., which was founded in San Antonio in 1998, opened data centers last year in Virginia and Illinois without considering its home state because of how the state’s margins tax is applied to its Internetbased business, company representatives testified to the Senate Finance Committee.
The issue is whether a company is taxed where its data centers are located or where its customers are. In Rackspace’s case, 90 percent of its customers are out of state, but the state applies its business tax to its data centers in San Antonio and Grapevine.
“That puts us at a competitive disadvantage” with data centers outside Texas that don’t pay a margins tax, Rackspace lawyer Alan Schoenbaum testified.
Cloud computing allows businesses to reduce their information technology costs by paying for Internet-delivered computing services from large data centers.
For most qualifying businesses, Texas’ margins tax — which replaced the franchise tax in 2006 — works out to 1 percent of their gross revenue minus one of three options: the cost of goods sold, employee compensation or 30 percent
of total revenue.
Rackspace officials want to pay the tax based on the company’s customers in Texas — a provision the Legislature already has applied for mortgage processing companies and pension fund management firms. But Rackspace officials will have to persuade lawmakers they are asking for more than just a reduction in their company’s tax bill.
“What’s unique about your industry that doesn’t open the floodgates” to other Texas businesses asking for special consideration, asked Sen. Robert Duncan, R-Lubbock. Schoenbaum suggested that reinterpreting how the tax is applied to Internet-based companies could raise more revenue, not less.
For example, when Rackspace locates a $100 million-plus data center in Texas, Schoenbaum said, the company pays eight times in sales tax for the equipment over what it pays in margins tax.
James LeBas, a tax consultant appearing for Rackspace, said other data centers are more likely to locate in Texas if the tax is applied to where the customers are and not where the equipment is.
“If you can’t get Rackspace, which loves Texas, to put a data center here, who would?” LeBas asked after the hearing.
Texas officials like to brag about the state’s business-friendly climate, but Schoenbaum said the company’s taxes in Virginia, which has an income tax, are a third of its taxes in Texas.
“So you’d rather have an income tax?” Duncan asked. “Yes,” Schoenbaum replied. Despite a projected budget shortfall of $18 billion, the Legislature is unlikely to adopt an income tax. State leaders are promising to balance the budget with spending cuts and without a tax increase. At the same time, lawmakers are scouring every tax exemption granted to any industry with thoughts of eliminating them.
But as other states are offering incentives for data centers to be located in their states, Schoenbaum said Texas is discouraging investment with a tax penalty.
When it comes to future expansions, Schoenbaum told the senators, “We won’t be in Texas unless the law is changed.”
Alan Schoenbaum Tax Rackspace based on where its customers are, not where equipment is, lawyer says.