Last week, the Michigan legislature presented a bill to Governor Rick Snyder that might stimulate data industry growth in the state. If signed into law, Senate Bill 616 will amend Michigan’s General Sales Tax Act to exempt companies engaged in data center related business from paying sales and use taxes.

Lawmakers developed this legislation after Switch, a Nevada-based data company, expressed interest in purchasing the former Steelcase “pyramid” outside Grand Rapids. Switch would use the space to house a 2 million square-foot SUPERNAP data center. However, Switch made the move to Michigan contingent on the state exempting it from sales, use, and property taxes. Senate Bill 616 took the request a step further by exempting all data centers and companies engaged in data center related business from sales and use taxes, but it does not exempt the industry from property taxes.

Senate Bill 616: Hard & Fast Facts

• The bill provides sales and use tax exemptions. The Michigan sales tax requires individuals or businesses selling tangible items to consumers to pay a 6% sales tax on their retail sales. The Michigan use tax accompanies the sales tax; it requires that 6% must be paid on the price of all taxable items brought into Michigan or purchased from retailers in other states.
• The bill does not provide for property tax exemptions, but data centers can still get property tax cuts up to 50% from local governments. Distressed cities can offer up to 100% property tax cuts.
• Described in a rather lengthy manner, the bill provides sales and use tax exemptions to companies that operate or are otherwise engaged in business with data center facilities. A data center is a location that houses a large group of networked computer servers used for remote storage, processing, or distributing large amounts of data.
• The tax breaks begin on January 1, 2016, but certain benchmarks must be met for the tax breaks to remain effective:
  • By January 1, 2022, at least 400 new jobs in the data center industry must have been created for the tax exemptions to continue.
  • By January 1, 2026, at least 1,000 new jobs in the data center industry must have been created for the tax exemptions to continue.
  • Assuming each of these requirements is met, the tax exemption will expire on December 31, 2035.
• Michigan economic development corporations are responsible for monitoring the industry job growth and reporting the numbers to the Department of Talent and Economic Development.
• Any revenue taken from the state school aid fund will be replenished each year from the state’s general fund.

The Broader Legal and Economic Context of Data Center Tax Incentives

Michigan’s Senate Bill 616 is part of a nationwide competition among states to capture investment from the rapidly expanding data center industry. Understanding the legal mechanics of these incentives—and how businesses can take advantage of them—requires looking at both state tax law and the regulatory framework governing data infrastructure investment.

Why States Offer Data Center Tax Breaks

Data centers represent massive capital investments. A single large facility can cost hundreds of millions of dollars to build and equip, and it requires significant ongoing expenditures for power, cooling, and maintenance. Critically, these facilities create relatively few permanent jobs per dollar invested compared to traditional manufacturing plants—which is why many states that once used broad industrial tax incentives have shifted to targeted data center exemption programs.

The economic rationale is straightforward: even though permanent job creation is modest, the capital investment generates substantial indirect economic activity. Construction jobs, power utility contracts, fiber infrastructure, and supply chain spending all flow into the local economy. States and municipalities calculate that the foregone sales and use tax revenue is more than offset by these secondary economic effects, plus the property taxes and income taxes generated over the life of the facility.

How Michigan’s Sales and Use Tax Exemption Works in Practice

Michigan’s General Sales Tax Act, M.C.L. §205.51 et seq., normally requires a 6% tax on all retail sales of tangible personal property. The companion Use Tax Act, M.C.L. §205.91 et seq., imposes a matching 6% tax on property purchased outside Michigan for use within the state. These taxes are a significant cost for data center operators, who purchase enormous quantities of taxable tangible property: servers, networking equipment, cooling systems, and backup power infrastructure.

Under Senate Bill 616, a qualifying data center and businesses engaged in data center-related activities would be exempt from both taxes on purchases of eligible property used in data center operations. The practical effect is that a $500 million server deployment that would otherwise generate $30 million in sales tax liability would be entirely exempt. For hyperscale operators like Switch, the savings are transformative when evaluating site selection decisions.

The Job Creation Benchmarks: Legal and Business Implications

The bill’s sunset and job-creation benchmarks create an unusual dynamic: the tax exemption is conditional on industry-wide performance, not just the individual facility’s employment levels. This means that a single data center operator who fully complies could lose its exemption if other data center businesses in the state fail to collectively meet the job thresholds by the statutory deadlines.

From a transactional standpoint, any business negotiating a site location agreement in Michigan based on this exemption should conduct careful legal analysis of these conditions. Long-term financing arrangements and capital expenditure plans premised on the exemption could be materially disrupted if the benchmark conditions are not met. Legal counsel should review whether representations about the exemption’s availability can be included in the site location agreement, and whether any state economic development agreements provide additional protections.

Property Tax Incentives: A Separate Track

Senate Bill 616 deliberately excludes property tax relief, leaving that to local governments. Under Michigan’s Industrial Facilities Tax Act, M.C.L. §207.551 et seq., local municipalities can offer property tax abatements for new industrial facilities, including data centers. Distressed communities certified under Michigan’s Renaissance Zone Act, M.C.L. §125.2681 et seq., can offer even more aggressive relief—up to 100% property tax exemption in some cases.

For a data center operator, the property tax piece is often just as important as the sales and use tax exemption. Data center real property (the building and land) and personal property (equipment) are both potentially taxable. Michigan assesses both, and in a large facility the aggregate property tax burden can run into millions of dollars annually. Securing a multi-year property tax abatement from the local municipality—ideally locked in through a written agreement before construction begins—can dramatically improve the project’s return on investment.

How Businesses Should Navigate Data Center Incentive Programs

If your business operates a data center or is planning to build one in Michigan, several steps should be taken to maximize available incentives and manage legal risk:

• Confirm qualifying status. The bill’s language defines data center operations in specific terms. Legal counsel should verify that your operations qualify under the statute’s definitions before relying on the exemption in financial projections.
• Engage local government early. Property tax abatements require local approval. Initiating those conversations during site selection—before committing capital—puts you in the strongest negotiating position.
• Document purchases carefully. Sales and use tax exemption claims require proper documentation. Exemption certificates must be presented to vendors at the time of purchase; retroactive claims are difficult to substantiate and may be denied in audit.
• Monitor benchmark compliance. Because the exemption’s continuation depends on industry-wide job creation, operators should track the Michigan Economic Development Corporation’s reporting and maintain awareness of whether the statutory benchmarks are being met.
• Consider state economic development agreements. For large investments, the Michigan Strategic Fund and MEDC can enter into customized incentive agreements that may provide protections beyond what the statute alone offers.

Michigan in the National Competitive Landscape

If signed into law, Michigan joins states including Virginia, Texas, Nevada, and Georgia in offering data center-specific tax incentives. Virginia, home to the largest data center market in the world in Northern Virginia, has offered data center sales tax exemptions since 2010. The competition for large hyperscale facilities is intense. For Michigan, which has significant advantages in terms of power costs, land availability, and geographic position relative to major Midwest markets, Senate Bill 616 represents a meaningful effort to attract investment that would otherwise flow to states with longer track records of data center development.

If you are in the data center industry, or you have questions about this legislation, contact the attorneys at Revision Legal here or call 855-473-8474.