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September 2, 2014

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Stealthy team effort led to $89M in tax breaks, drew Apple to Reno-Sparks

For months, Apple executives have waged a stealth campaign in Northern Nevada to win an unprecedented package of tax incentives that will allow the company to escape almost entirely a state sales tax bill on $1 billion worth of servers for a data storage center it wants to build just outside of Reno.

Since February, the company has wooed local elected officials, met with the governor and worked with a local developer, scrupulously keeping its name out of any public document and off any public agenda until just hours before a county commission meeting Tuesday to endorse the deal.

Indeed, the fact that it was Apple seeking the tax breaks wasn’t publicly known until 8 a.m. Tuesday, less than three hours before the Washoe County Commission unanimously signed off on a deal worth $89 million in tax abatements over 10 years.

Apple won the county commission’s endorsement in a hearing that lasted a scant 20 minutes, during which no one testified in opposition or even rose to question the tax breaks.

Instead, the developer, Apple executives and lobbyists sung the praises of the project, and commissioners almost giddily endorsed the tax incentives before posing for a photo in the commission chamber with the businessmen who brokered the deal.

The commission’s endorsement sets in motion a final 30-day approval process that runs through Gov. Brian Sandoval’s economic development office. But state law gives the office little discretion to reject the abatements as long as the company meets four simple criteria — all of which it has met.

The proposed data center is an exciting project for Northern Nevada.

An economic impact analysis — named “Project Jonathan” after the medium-sized sweet apple to hide the company’s identity — estimates it will generate 329 direct and indirect jobs for the community with a total personal income of $15 million.

Construction of the data center just east of Sparks is expected to generate a one-time $103 million economic impact, and Apple has said it will invest $1 billion in equipment for the storage center.

Perhaps more valuable than the dollars and cents, however, is the cachet of attracting an internationally renowned company such as Apple as the first user of the nascent Reno Technology Park.

Click to enlarge photo

Steve Hill

“When a company like Apple chooses to locate in Nevada, that causes other major companies to take a second look at the state, and I think that there will be significant interest on the part of others because this deal took place,” said Steve Hill, the executive director of the Governor’s Office of Economic Development.

“The agreement to move forward with this project represents a watershed moment for our region’s economic future,” Washoe County Commissioner Robert Larkin gushed in a statement.

But while the project is estimated to generate $105 million in tax revenue over the next decade, government coffers — including the state’s — will see just $16 million of it, according to the Project Jonathan study.

Under the deal with Hill’s office, Apple is eligible to abate 85 percent of the personal property tax owed on its servers.

And in a creative move, Apple also was able to cobble together various tax incentives to eliminate almost its entire sales tax bill.

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The offices of Braeburn Capital, an Apple subsidiary that manages and invests Apple's cash, in Reno. Nevada has a corporate tax rate of zero, as opposed to 8.84 percent levied in California, where Apple has its headquarters.

Here’s how it will work: The state can waive all but 2 percent of the sales tax rate for the server equipment Apple purchases for the data center. But by opening a second location in a special tourism improvement district in downtown Reno — an office meant simply to receive shipment of those servers — Apple is eligible to be reimbursed 75 percent of the 2 percent sales tax it still owes.

That piece of the deal is up for City Council approval today.

After all of its abatements and reimbursements, Apple would pay only 0.5 percent sales tax — instead of 7.5 percent — on the $1 billion in server equipment it’s expected to buy over the next 10 years.

Hill said the abatement was necessary to make Nevada competitive with other states vying for the business. Apple could have expanded its existing data center in rural Oregon, which doesn’t impose any sales tax, he said.

Hill also said Apple has agreed to special audits by the state tax department to ensure it is living up to its end of the bargain in terms of employee salaries and capital investment. If it doesn’t, it would have to pay the abatements back to the state.

Click to enlarge photo

The offices of Braeburn Capital, an Apple subsidiary that manages and invests Apple's cash, in Reno. Nevada has a corporate tax rate of zero, as opposed to 8.84 percent levied in California, where Apple has its headquarters.

If the project were to move forward without any tax abatements, state coffers would collect $16 million, the county and city would collect nearly $40 million and the school district would get $26 million over 10 years.

But project proponents argue that shouldn’t be looked at as lost money. Without the abatements, the project wouldn’t move forward at all and the economic impact would be nil.

Hill acknowledged that details of the deal were kept quiet until the last minute, but he argued that wasn’t out of fear of generating public opposition to the tax abatements.

“Obviously, they are a very high-profile company,” Hill said. “Our concern was that the public rumor mill would actually have run them off.”

Hill said elected officials in charge of ratifying the deal were kept in the loop, even if the public wasn’t until the very last minute.

“This was not sprung on the elected officials or staff,” Hill said. “All along the way we have talked to the city of Reno and their staff, the school district and their folks, the county and their folks. This has been a team effort in order to make sure this was done correctly and in the best interest of everyone.”

But Reno Councilman David Aiazzi said that while he had heard earlier this year that Apple was looking to build a facility in Nevada, he wasn’t given the details of the tax abatements until Tuesday morning.

“It’s private enterprise doing all the secrety stuff,” Aiazzi said. “I don’t know if the governments are hiding anything. It’s more been the guys working the deal.”

Apple has partnered with several Northern Nevada powerbrokers to work the deal. Greg Ferraro, a close adviser to Gov. Sandoval, was hired to represent Apple before the city and county.

Reno developer Steve Polikalas, who is experienced at working government financing deals, is the developer on both the downtown Reno tourism improvement district and the Reno Technology Park.

Still, Aiazzi doesn’t think the confidentiality is necessarily a problem.

Although Apple’s name wasn’t made public until Tuesday, the details of the tax abatements were released a week ago by the Washoe County Commission. It’s not their fault that no one noticed the broadly worded agenda item, Aiazzi argued.

But Aiazzi said Apple is striking at the right time, offering a recession-stricken community the prospect of high-paying jobs.

“If everything was good and the economy was great, we may not think this is such a good deal,” Aiazzi said. “But for the people who get the jobs out there, who are saying, ‘I need the money,’ for them it’s worth it.”

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  1. When people are working they shop, they buy groceries, they buy houses, all of which are taxed so you give up taxes on one hand and gain tax revenue on the other. I think this is win/win.

  2. Congrats to the Apple people for getting the tax breaks and to the people in Reno who now may have a new job...

    However, Having an office just to receive packages, in a tourist corridor, for tax purposes... You would think Harry Reid set that scam up!!

  3. Seriously fantastic job Nevada! To get an Apple datacenter in the state is a huge coup. And all the state had to "give up" was some fictitious tax revenue it never would have gotten in the first place. The state now has tech cache (critical for attracting other co's), it now has 329 more jobs, it has huge economic boost during the construction of the facility (and tax revenue from the co's associated with building it), and it will earn more tax than estimated as these projects always take on a life of their own and will almost certainly be larger than the $1B estimate.

    By giving away nothing the state gains a lot. Go get more, we need it!

  4. Good move on Reno's part. They lose nothing and gain tax income and jobs at no real out of pocket cost.

    Would have been great to see them come to Vegas since we already have some of the biggest and best data centers in the world located here.

    Now that Apple has stepped up others will follow and Vegas will get their part of it.

  5. what a coup for APPLE!
    More corporate welfare and purchase of political juice.
    More money to put in their executives' salaries and bonuses.

    It's like offering a teaspoon of water to a person dying of thirst in the desert.

    Cruel and selfish... just as Foxconn is, only this time they are scamming Americans for more low paying jobs... unless they just transfer the employees they now have elsewhere.

    This is NOT good for NV and sets a precedent for ripping off the state by more corporate giants that can well afford the tax rates.

    Small business owners get NO BREAKS, struggle along, and pay penalties when late. Wise up people. If they were bringing in 1000s of jobs, that's one thing, but 300???

  6. I hope that State of Nevada gets some free computers out of the deal.
    How many jobs are created outside of the jobs to build the data center? These types of deals never seem to work out for the states that make them.

  7. Certainly this is a deal that could help diversify our economy a bit, depending on how the development of technology actually happens in Nevada.

    Definitely, the benefit for Apple is the tax giveaway to get them here.

    Also, it was very clever to do this while peoples attention is on election campaigns.

    There is an issue that isn't addressed in this article.

    1. How much energy will Apple's cloud center require?

    2. What will the source be?

    3. What type of energy will supply Apple's cloud center?

    4. What will the ultimate cost be to the public in increased rates?

    We have 3 Apple computers and an iPad, but with all the increases in utilities and taxes, they are the last Apple products we will have. We don't use cloud and won't be able to because of costs.

    So, great for Apple, but maybe not so great for all but 329 direct and INDIRECT(?) Apple employees.

    I'm still in a holding pattern regarding the benefit. It depends.

  8. With all the enthusiasm surrounding Apple's pseudonyms, Braeburn and Johnathan, how about a new Nevada State motto: Granny Smith Pimps Nevada!