Understanding Illinois tax incentives for data centers

From an economic development standpoint, a data center is a grand slam. 

And Illinois is doing what it can to keep its competitive edge against other states with a $45 billion capital bill that provides tax incentives for data centers.

Illinois currently ranks third in the country for data center capacity, but the competition is heavy. Apple recently opted to build a data center in Iowa. If it were built in Illinois, it would have created 3,360 jobs, $203.9 million in labor income and $521 million in economic output.

The primary incentive is a sales and use tax exemption on “qualified tangible personal property” used in qualified data centers. 

In addition, for new qualified data centers located in underserved areas an income tax credit of 20% of the construction worker wages paid for the project is provided.

The statute defines a data center as a facility:

• Whose primary services are the storage, management and processing of digital data
• That is used to house
  • Computer and network systems, including associated components such as servers, network equipment and appliances, telecommunications and data storage systems
  • Systems for monitoring and managing infrastructure performance
  • Internet-related equipment and services
  • Data communications connections
  • Environmental controls
  • Fire protection systems
  • Security systems and services

This is not a program for small mom-and-pop IT businesses.  To be considered a qualifying Illinois data center a capital investment of at least $250 million is required. 

The sales and use tax exemption incentive is available for both existing and new Illinois data centers.

For existing Illinois data centers, the $250 million capital investment must have been made over the 60-month period immediately prior to January 1, 2020, or over a 60-month period commencing before January 1, 2020 and ending after January 1, 2020. 

For a new Illinois data center, the $250 million capital investment must be made over a 60-month period.

In addition, to be eligible for incentives, the capital investment must create at least 20 full-time or full-time equivalent jobs with compensation of at least 120% of the median wage for the county in which the data center is located. 

The data center also must be carbon neutral or obtain certification under one or more specified green building standards.

Qualifying Illinois data centers must apply to the Department of Commerce and Economic Opportunity for certification.  The duration of the exemption can’t exceed twenty years.

The department and any data center seeking the exemption must enter into a memorandum of understanding that at a minimum provides:

• The details for determining the amount of capital investment to be made
• The number of new jobs created
• The timeline for achieving the capital investment
• The repayment obligation should those goals not be achieved and any conditions under which the repayment will be required
• The duration of the exemption
• Other provisions as deemed necessary by the department

What data center tax exemptions covers

The sales and use tax exemption applies to qualified tangible personal property used in the data center. 

The kinds of tangible personal property qualifying for the exemption is broad: 

• Electrical systems and equipment
• Climate control and chilling equipment and systems
• Mechanical systems and equipment
• Monitoring and secure systems
• Emergency generators
• Hardware;
• Computers
• Servers
• Data storage devices
• Network connectivity equipment
• Racks
• Cabinets
• Telecommunications cabling infrastructure
• Raised floor systems; peripheral components or systems
• Software
• Mechanical, electrical, or plumbing systems
• Battery systems
• Cooling systems and towers
• Temperature control systems
• Other cabling
• Other data center infrastructure equipment and systems necessary to operate qualified tangible personal property, including fixtures
• Component parts of any of the foregoing, including installation, maintenance, repair, refurbishment and replacement of qualified tangible personal property to generate, transform, transmit, distribute or manage electricity necessary to operate qualified tangible personal property
• All other tangible personal property that is essential to the operations of a computer data center
• Building materials physically incorporated in to the qualifying data center

For new Qualifying Illinois Data Centers constructed in underserved areas an income tax credit is also available. 

The credit is 20% of the wages paid during the taxable year to a full-time or part-time employee of a construction contractor employed by a certified data center.

To be considered underserved for purposes of the credit the new data center must be in a geographic area that meets any one of the following criteria:

• The area has a poverty rate of at least 20%
• 75% or more of the children in the area participate in the federal free lunch program
• 20% or more of the households in the area receive assistance under the SNAP program
• The area has an unemployment rate that is more than 120% of the national average for at least two consecutive calendar years prior to the application date

For partnerships and S corporations the credit is passed through to the partners and shareholders.  Any credit that exceeds the current-year tax may be carried forward for five years.