Tech firm: State tax un­fair for Web work

San An­to­nio-based rackspace cites mar­gins tax in choice to build out-of-state data cen­ters

Austin American-Statesman - - BUSINESS - By Lay­lan Copelin

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.