Microsoft's Azure moving out of Washington

A change in the interpretation of tax laws prompted the shift

Microsoft will soon move its Azure services off its data center in Washington, due to changes in the way such facilities are taxed in the state.

In a blog post earlier this week, the company informed early users of the Azure platform that they'll need to move their applications off the data center located in Quincy, Washington.

Microsoft said it will soon offer users an automated tool that will help them migrate to its Southwest data center, most likely a reference to one in San Antonio, Texas.

"This change is in preparation for our migration out of the northwest region," the blog post reads.

"Due to a change in local tax laws, we've decided to migrate Windows Azure applications out of our northwest data center prior to our commercial launch this November."

However, the company will continue to use the data center for other online services, a Microsoft spokesman said. He did not respond to a question about why Microsoft would pull the Azure services from the facility but still host others there.

The relevant tax issue began to unfold in late 2007 when Washington's attorney general wrote an opinion stating that data centers do not qualify as manufacturers, which in some areas of the state are exempt from paying taxes on new projects, including buildings and the equipment in them.

Manufacturers in rural areas also get new employee business and occupation tax credits. Before that opinion was issued, some data center operators believed that they could be considered manufacturers and thus get those tax breaks.

After the attorney general's opinion made it clear that the data center operators would have to pay those taxes, Washington Governor Christine Gregoire drafted a bill that would have handed data center operators a discount on their taxes for equipment in the facilities, but the bill did not pass.

Politicians and residents in Washington regard the data centers with mixed feelings. Though hundreds of people may be employed to build the facilities, typically very few jobs are required to run and maintain them once they are built.

"While the legislature considered several bills to extend favorable tax treatment to these centers, none passed due to concerns that the amount of tax that would be forgiven was very large compared to the few jobs that would be created," said Mike Gowrylow, a spokesman with the state's Department of Revenue.

Plus, tax incentives were not the only reason that companies such as Microsoft, Yahoo and Intuit built data centers in Washington.

"There are a lot of other advantages here that I think outstrip the sales tax," he said.

Hydro electricity is cheap and plentiful in the region, keeping operating costs for the data centers low. Land is also cheap, and people with high-tech skills are available from Seattle, which is near Quincy, he said.

Yahoo and Intuit did not reply to a request for comment about the tax situation in Washington.

An executive who used to run Microsoft's data center operations said these types of tax disputes will continue in the future.

"You are essentially seeing the beginning of a cat and mouse game that will last for some time on a global basis," Mike Manos, senior vice president for Digital Realty Trust, wrote on his blog.

"States and governments are currently using their blunt, imprecise instruments of rule (regulations and taxes) to try and regulate something they do not yet understand but know they need to play a part of," he said.

He has worked on three data-center site selection programs and said that tax and regulation play a significant role in the decision process.

"The reason is pure economics over the total lifetime of an installation," he wrote.

The OakLeaf Systems blog was one of the first to report on the Azure announcement, and the post includes some background on the tax issue.

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