Government, Law, and Technology

Switch, school districts at odds over taxes

Data center claims error on state’s part; school superintendents and other lawmakers say there should be no exemption.

October 11, 2019
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A tax battle may force some school districts to refund more than $600,000.

Switch, a data center in Gaines Township, is working with Michigan lawmakers to pass Senate Bill No. 455 that would exempt the company from paying personal property tax. 

The new bill is the result of ambiguity between the Renaissance Zone Act, the Property Tax Act and the Renaissance Zone Development Agreement that was signed between Switch, Norman Pyramid and the Michigan Strategic Fund.

Adam Kramer, executive vice president of strategy at Switch, said when the company moved to West Michigan in 2015, it wanted to be on equal footing regarding taxes with other data centers in other states such as Indiana and Ohio, among others, to be competitive.

“In those states, data centers and clients who put their equipment in there do not pay sales use tax and personal property tax,” he said. “We said, ‘As long as we are even with those states, Switch will not only compete, we will be successful and build a thriving business eco-system in the state.’”

Switch officials and lawmakers were able to work together to write and eventually pass a bill that allowed for the exemption of sales use tax for all data centers across the state in 2015. Kramer said instead of seeking a personal property tax exemption, Switch agreed to operate under the Renaissance Zone Act, which exempts it from paying certain taxes. 

A renaissance zone is an economically disadvantaged area that is designated for redevelopment. The property that Switch now occupies was considered a renaissance zone because it is on the site of what was once the Steelcase Pyramid building, which was left vacant for years.

After the Renaissance Zone Development Agreement was signed in 2016, Gaines Township was not collecting personal property taxes from Switch in 2017 and 2018.

“Neither Switch nor our clients received a tax bill as agreed upon with the creation of the Renaissance Zone Act,” Kramer said. “Then, this year, we found out that there was a ‘conflict in law between the Renaissance Zone Act and the property tax act.’”

Ron Leix, spokesperson for the Michigan Department of Treasury, said the department has no position on SB 455. However, he said through the course of normal business, they had a discussion with Gaines Township about how state law provides that certain millages are not exempt.

“There was no change in interpretation of the state law or the agreement,” he said. “And no directive was issued by the state Treasury Department.”

As a result, Gaines Township began charging the data center property tax this year. However, Switch is working with lawmakers to clarify the law because, under the Renaissance Zone Act, Kramer said they are exempt from those taxes.

The Renaissance Zone Act states “except as otherwise provided in section 10, property located in a renaissance zone is exempt from the collection of taxes under all of the following: (a) Section 7ff of the general property tax act.”

State Sen. Jim Stamas, R-Midland, introduced the new bill. He said the bill is only to clarify the conflicting laws.

“Once the state makes a commitment, in order to stay viable as a state in trying to bring more businesses to Michigan, I believe that we have to live up to the commitment,” he said. “That was my key focus, to try to clarify the tax law. I don’t want to expand it. I am not trying to change the original intent. I just want to clarify the law.”

The bill has passed the Senate and is now in the House of Representatives Commerce and Tourism Committee.

Despite the bill moving forward, there is another problem regarding the Renaissance Zone Development Agreement that Switch signed.

The agreement states “the company and the owner acknowledge that the benefits provided under MCL 125.2689 do not include relief from the payment of certain property taxes relating to bonds, school sinking fund obligations and special assessments described in MCL 211.7ff.”

School superintendents and other lawmakers in West Michigan are disputing the bill they say serves as a tax break for Switch, which would, in turn, harm local school districts, including Caledonia Community Schools and Kent ISD.

“If this legislation is passed, it will have negative consequences for every school district in Kent County,” said Ron Caniff, Kent ISD superintendent. “Since the bill is retroactive, school districts would have to refund $624,950 of taxes that have already been paid out of their budgets. No other company within a renaissance zone located in Kent County or across the state is exempt from the taxes in question, and frankly, this legislation runs counter to the agreement Switch signed with the state of Michigan in 2016. The additional tax break this legislation would create will have an impact on the students we serve.”

Rep. Steven Johnson, R-Wayland, said Switch was not exempt from paying personal property tax.

“The agreement is abundantly clear that they aren’t exempt from the personal property tax,” he said. “Unfortunately, the township messed up and did not bill them for the tax, so they didn’t pay it for two years and (later) caught the error and realized it. Now, (Switch) is saying the government made a mistake on this one and that is certainly not the case. The mistake wasn’t that taxes weren’t supposed to be levied, these taxes were always supposed to be levied and that is why they are trying to change the law right now. What they are asking for is a carve-out that no other company in the state of Michigan gets. They would be the only data center exempt from personal property tax. That gives them a huge competitive advantage over any other data center in the state.”

According to the Michigan Senate Fiscal Agency, the bill would reduce both state and local unit revenue by at least $373,000 per year. Additionally, if Switch continues to invest up to $100 million in the data center, the revenue loss under the bill would increase to more than $676,000 per year. If the investment totaled $5 billion, the revenue loss would exceed $20.1 million per year.

“The estimates above are based on taxable values and year-to-date 2019 tax levies,” the Senate Fiscal Agency stated. “Accordingly, they represent revenue that otherwise would be received by a single local unit of government and the local intermediate school district. The retroactive amounts that would need to be refunded also would affect revenue received by the county jail, various senior and veteran programs in the area, the local zoo, and additional local units of government. It is unknown if levies for those other taxing authorities would be levied on the winter 2019 tax bill or in subsequent years.”

“We need to recognize when it comes to educating children, we all have a part to play,” said Dedrick Martin, Caledonia superintendent. “Caledonia is a fantastic community because everyone does their part to support our schools. Our concern with this bill is it exempts one company from paying a tax that all members of our community pay to provide our kids with a learning environment that meets their needs.”

Sen. Winnie Brinks, D-Grand Rapids, said schools in her district would be heavily impacted by the bill.

“This bill would extend additional tax relief to only one company and it would require our schools to pay back hundreds of thousands of dollars from their budget that goes to support students,” she said. “This really, in a nutshell, is the problem. It is clear from the beginning that they signed an agreement with the state in which it is clear that they should have been paying these taxes, and ultimately, it is important that our schools are not harmed when we as a state decide to give tax relief to certain businesses or industries.”

Kramer said the notion that Switch is negatively impacting local schools is not true.

“The concern from local schools is a bit unfounded because the company wasn’t paying that tax previously and not just that, Switch has been a major contributor to education initiatives throughout the state,” he said. “We have worked with over 62,000 students and donated over a half of a million dollars to STEAM (science, technology engineering, arts and math education) throughout the state, and we continue to be an active participant.”

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