The Florida legislature has passed a bill that would end the data center sales tax exemption for existing data centers with a critical IT load of less than 100 megawatts (MW), effective Aug. 1, 2025. This may materially impact existing sub-100 MW data center owners and tenants, in addition to developers who are currently developing and constructing sub-100 MW data centers.
HB 7031: Understanding the New 100 MW Threshold for Sales Tax Exemption
The Florida data center exemption currently allows the owner, tenants, and construction contractors to purchase necessary equipment and materials to construct, equip, and operate a data center free of the states’ 6% sales tax (plus local option tax of typically 1% to 1.5%). Whether it was the legislative intent to end the sales tax exemption for existing and under construction sub-100 MW data centers is unclear, but this appears to be the practical effect of HB 7031, the legislature’s 200-page 2025 tax bill.
This exemption’s termination as of Aug. 1, 2025, may materially impact continuing operations even though all of the data center equipment and components have been purchased tax-free prior to Aug. 1, because the sales tax exemption applies not only to construction and equipment purchases but also to ongoing purchases of electricity. Since the exemption was meant to be permanent, and the benefit thereof was intended to be passed through to data center tenants, the loss of the exemption for electricity may hinder landlords’ ability to keep existing tenants and attract new ones to their data centers. The loss of the exemption might also result in a material breach of the owner’s covenants under some existing leases with tenants and possibly their loan agreement with lenders, ultimately impacting the underwriting and valuations attributable to these assets.
The language would eliminate, as of Aug. 1, 2025, the exemption for existing sub-100 MW data centers because the exemption statute requires a data center owner to go through a review process every five years to maintain their permanent exemption certificate. As part of this review process, the owner must certify that the data center’s critical IT load is 100 MW or higher. This means that when a sub-100 MW data center goes through its five-year review process after the Aug. 1, 2025, effective date, it would not be able to provide this certification and lose the exemption. Furthermore, the statute provides that in the event of a sales tax audit, if tax-free purchases were made after the data center lost its eligibility for the exemption, then the owner and tenants must pay back taxes, penalties, and interest on a retroactive basis. Since the new 100 MW requirement takes effect Aug. 1, then all purchases that owners and tenants of sub-100 MW data centers make after the effective date would appear to be subject to sales tax. The amendment to the exemption statute provides no grandfather rule for existing sub-100 MW data centers.
Potential Implications for Existing Data Center Owners, Tenants, and Contractors
As for sub-100 MW data centers currently under construction, this change would also impact the contractors and subcontractors constructing the projects. The data center exemption law allows contractors to also use this sales tax exemption when purchasing materials to “construct, outfit, operate, support, power, cool, dehumidify, secure, or protect a data center and any contiguous dedicated substations.” Under Florida sales tax law - for most types of construction contracts - the contractor (including a subcontractor) is considered the ultimate consumer of the materials they purchase, and therefore the contractor must pay sales tax on their purchases to carry out their contract. As a result, a contractor on a data center project under construction may have priced their bid on the assumption that no sales tax would be paid on many of the items purchased to fulfill their contract. If this bill is signed into law, contractors may no longer be able to purchase items tax-free after Aug. 1, and new developments may see higher costs. Data center operators with projects currently under development in the state should review their construction agreements to determine who bears the risk.
This amendment did not become a part of HB 7031 until a few days before the legislature passed this 200-page bill on June 16, and there is no detail in the bill’s staff analysis. Furthermore, HB 7031 also repealed the sales tax on commercial leases in Florida, which tenants must pay on their data center lease payments (typically 3% - 3.5% of the lease payment, depending on the county), which might have been a justification for the legislature to terminate the data center exemption for equipment and electricity.
Key Takeaways
Even if the legislature addresses this concern in next year’s legislative session, this may leave sub-100 MW data centers in limbo until that occurs. If the lease agreement with a data center tenant provides that the loss of the sales tax exemption is a breach thereunder, some tenants might use that as a reason to terminate their lease or further amend to the terms thereof.
This data center exemption is a small portion of HB 7031. Because this tax bill is integral to the legislature’s budget bill, which must be enacted by July 1, it is included among several provisions that are expected to move forward. It is possible that, if concerns are raised, Gov. DeSantis might instruct the Department of Revenue to consider issuing guidance delaying the enforcement of the loss of exemption for existing sub-100 MW data centers until after the legislature has the opportunity to address this next year.