Indirect Tax Risks for Data Centers

PROPERTY TAX RISKS FOR DATA CENTERS

Property tax is a persistent area of overexposure for data centers, driven largely by their complex mix of real estate, personal property, and rapidly depreciating technological assets. Valuation challenges can arise at any stage—during planning, ownership changes, or ongoing operations—particularly when assessors lack the specialized expertise required to value these assets accurately.

The result is often a patchwork of practices that inflate assessments, misclassify assets, and overlook critical tax attributes. These errors increase liabilities, complicate forecasting, and may even undermine property tax incentives. Taxpayers must stay proactive and monitor how facilities are valued, classified, and reported to maintain a defensible and optimized tax position.

VALUATION APPROACH

Assessors may default to generic cost models, apply jurisdiction-agnostic schedules, or rely on outdated benchmarks. This is especially problematic for high-value data center components such as containerized computer units, modular cooling infrastructure, or battery backup systems. These asset types have unique depreciation curves and operational profiles, and must be analyzed individually to ensure depreciation schedules align with real-world asset behavior.

Taxpayers should regularly review assessment methodologies and ensure modeling assumptions reflect actual asset performance—especially when appealing assessments, forecasting liabilities, or tracking incentive compliance.

ASSET CLASSIFICATION

Asset classification is a persistent source of property tax exposure for data centers, largely due to the unique way infrastructure is integrated across real estate and personal property. Jurisdictions may classify systems like racked electrical infrastructure, conduit-based fiber runs, or power distribution equipment differently depending on how they’re installed, connected, or interpreted under local rules. Even within a single facility, similar assets may be categorized inconsistently, especially when assessors lack technical familiarity with data center layouts or rely on outdated guidelines.

These inconsistencies can result in duplicative taxation, inappropriate depreciation treatment, and added complexity during appeals. Taxpayers should monitor classification practices across jurisdictions and proactively resolve discrepancies to reduce liability and ensure assets are assessed consistently and defensibly.

OBSOLESCENCE RECOGNITION

Improper or incomplete application of functional and economic obsolescence is a major contributor to inflated assessments among data center taxpayers. Technological components such as computer and storage hardware often require upgrades every four to six years, while mechanical systems may become obsolete due to shifts in capacity needs, energy efficiency standards, or regulatory requirements. Yet many jurisdictions continue to assess these assets using static improvement-based schedules.

Taxpayers should maintain thorough documentation of system upgrades, lifecycle planning, and external market pressures to support obsolescence claims and ensure assessments reflect actual remaining utility.

EMBEDDED INTANGIBLES

Non-taxable data center elements such as internally developed software, custom control systems, or proprietary network designs—are sometimes improperly bundled into taxable property values. These embedded intangibles often go unnoticed unless challenged through detailed documentation and jurisdiction-specific advocacy.

Taxpayers must identify and clearly separate non-taxable components when reviewing or contesting valuations to prevent unintended taxation and preserve defensibility.

SELF-REPORTING AND ASSET TRACKING

Some property tax risk originates not with assessors, but with the taxpayers themselves. Organizations may overlook disposals, misreport asset types, or apply incorrect depreciation schedules, especially when IT procurement is decentralized or outsourced. Fast-depreciating data center components like distribution units, cooling modules, or rack-mounted batteries are particularly vulnerable to tracking errors.

Establishing baseline values during development, and maintaining a jurisdiction-aligned, well-documented asset inventory, are critical to avoiding year-over-year reporting failures. These practices help preserve incentive eligibility, support defensibility in audit situations, and prevent cumulative overassessment.

INCENTIVE AND EXEMPTION APPLICATION

Data centers often benefit from property tax incentives such as abatements for real estate investment, exemptions on qualifying business personal property, or infrastructure-linked tax credits. However, these incentives are frequently misapplied or omitted during ownership changes, operational transitions, or reassessment cycles.

Whether due to administrative oversight, assessor turnover, or poor internal tracking, these benefits can silently erode without proactive enforcement. Taxpayers must actively monitor incentive applications, verify eligibility across tax cycles, and ensure that awarded benefits are properly integrated into all relevant assessments.

TRANSACTION TAX RISKS FOR DATA CENTERS

For most data center projects, transaction tax exposure begins long before the first server is switched on. How construction and procurement are structured determines whether millions in costs are properly exempt—or taxed unnecessarily. Two of the biggest problem areas are EPC contracts and procurement arrangements.

EPC CONTRACTS

Engineering, Procurement, and Construction (EPC) contracts can be especially complex from a tax perspective. Different states interpret EPC arrangements differently, and subtle variations in contract language can dramatically change tax outcomes. If a contract does not clearly define which party is responsible for labor, materials, equipment, and services, the entire bundle may be treated as taxable. This often leads to costly disputes and audit findings, particularly in jurisdictions like Nevada where these issues are frequent.

The best protection is precision. Contracts should carefully document each party’s responsibilities, with wording that supports exemption eligibility. Retaining the right to audit can also prevent disputes down the road. Addressing these issues before construction begins is far easier—and far less expensive—than trying to correct them after the fact.

PROCUREMENT ARRANGEMENTS

Procurement companies are often used to capture bulk purchasing discounts and streamline supplier management. While efficient, these arrangements can also create significant tax headaches. Auditors may have difficulty tracing purchases back to the owner or operator, and procurement companies don’t always allocate sales tax to the correct entity. In some states, incentives require direct investment by the owner, which can invalidate exemptions if procurement companies act as the buyer.

In addition, procurement firms may layer on licensing fees, service charges, or other costs that complicate exemption claims. That said, they can still deliver value if structured thoughtfully. Data center teams should weigh both the compliance risks and the cost savings before deciding whether to rely on procurement intermediaries.

When structuring EPC contracts and procurement strategies, clarity and documentation are key. Taking the time to align contract terms and purchasing practices with tax rules up front can prevent disputes and protect incentives later.

THE COST OF INACTION

Indirect tax exposure isn’t just an accounting concern for data centers. It directly impacts profitability, capital planning, and competitive viability. Over-taxation can add up to millions of dollars over the life of a facility. Taxpayers who take a proactive approach to tax strategy can protect themselves from hidden costs, strengthen audit-readiness, and ensure their projects remain financially competitive.

DMA: A STRATEGIC TAX PARTNER FOR DATA CENTERS

DMA helps data center taxpayers stay ahead of risk—from managing complex property valuations and preserving incentives to advising EPC contracts and procurement arrangements—we are your fully-outsourced compliance solution.

We serve as an extension of your tax department, taking on the heavy lifting of jurisdictional advocacy and documentation so your team doesn’t have to do it alone. With decades of experience across indirect tax and incentives, we know where the pitfalls lie and how to prevent them.

Ultimately, our goal is simple: streamline your tax processes, shield your organization from unnecessary risk, and help you retain more of your capital so your data center investments can go further.