The Risk of Changes in Taxation

I’ve just been reading a very interesting blog post by Michael Manos on the impact of regulatory changes on the location of data centers.

You want to build a new data center and resell its services in the era of cloud computing. Your criteria for site selection are probably:

• Cheap Power
• Good Internet Connections
• Temperate or cool location (cooling is a major expense)
• Availability of suitable staff

So you build your data center. As a new business moving to the area you may even be offered some tax breaks to do so.

Your business model depends upon being able to offer cheap computing and storage services: you are competing against other suppliers and a price of a few cents per gigabyte-month or per cpu- hour is significant.

Then the tax situation changes. You start having to pay retail sales tax on new equipment. Then another tax change makes the delivery of computing services a taxable service. Suddenly your shiny new data center is not competitive.

Tax changes in a couple of US states have made it uneconomic to place or expand data centers there. This has impacted companies such as Microsoft and Yahoo. So add to that list of requirements a suitable tax structure which is unlikely to be changed during the life of the data center.

Perhaps Google’s and Sun’s computer center in a shipping container are the way of the future, with resources that can be moved around according to the place which currently best meets the data center’s requirements.

Michael Manos’ blog post is well worth reading. It touches also on the effects of changes to privacy and government snooping legislation. An article by Cade Metz of The Register (which drew my attention to the blog post) provides some relevant facts which back up the original post.