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November 23, 2014

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political memo:

For state economic development efforts, Apple deal something to build on

Gov. Brian Sandoval landed a huge feather for his economic development cap last week with the announcement that Apple will build a $1 billion data center and purchasing office in Northern Nevada.

Sandoval has made economic development a cornerstone of his administration. And a cornerstone of his economic development plan happens to be cutting a slice of the burgeoning data storage industry pie.

Apple’s arrival in Northern Nevada has been heralded as the kernel that will grow that industry, bringing with it high-paying engineering and technology jobs.

Corporate data storage and business information technology are, combined, one of seven industry clusters — identified in an analysis by Brookings Mountain West — that Nevada will focus on as Sandoval pursues his economic development strategy.

Data storage centers generate construction jobs (badly needed in Nevada) and skilled tech jobs, but what will they do for that secondary goal of broadening the tax base?

Data centers are attractive because they generate continual capital investment. Computer servers tend to wear out quickly and need to be replaced.

In fact, that tends to be about the only activity at a data center that ends up being taxable.

Construction of a data center is usually lucrative from a tax standpoint, and Apple wasn’t given a break on the sales tax it will have to pay to build and develop its center. Apple will also have to pay real property taxes on its land and buildings and modified business taxes on its payroll.

Once a data center is up and running, though, there isn’t much left to tax. Even if Nevada taxed profits, data centers don’t generate any. They don’t sell goods or services.

But they do buy goods. Apple is expected to buy $1 billion worth of computer equipment over the next decade.

That’s where the state’s tax breaks come in. The state will abate 85 percent of the personal property tax owed on Apple’s equipment. And instead of paying about 7.5 percent sales tax, the company will pay 0.5 percent sales tax on it.

The question then: Why should the state focus on attracting data centers if they aren’t going to help broaden the tax base?

Sandoval’s economic development director, Steve Hill, points out that Apple isn’t exactly skating tax-free. According to an economic impact statement, the company will pay about $16 million in state, local and school taxes over 10 years.

But will other companies get the same deal?

Those involved in the effort to bring Apple here said there’s a benefit to being first out of the gate.

“The companies that come along after don’t always get that same deal,” Reno Councilman Dave Aiazzi said.

Apple did set a precedent for a benefits package that other companies will probably look to replicate.

Steve Polikalas, a partner in Unique Infrastructure Group, the developer of the technology park and tourism improvement district where Apple will locate, said data centers generate ongoing construction jobs as they expand to house more servers. (That can’t always be counted on, though. Officials in Prineville, Ore., had expected Apple to expand there. The company decided to build in Reno instead.)

Apple is expected to build out significant infrastructure at its Northern Nevada campus, including its own renewable energy power plant.

But much of what Apple is expected to bring Northern Nevada is cachet. The data storage industry is growing by leaps and bounds. Economic development folks hope Apple will be a draw for other companies.

“Data centers aren’t here because Brookings said they should be, but because private industry guys like us have been looking at this for a while and know there will be an explosion of information storage needs,” Polikalas said, adding he’s happy Brookings agrees. “Nevada is a great home for that and will drive further economic development activity in the state.

“We gotta start somewhere.”

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