Hi Mike Henderson,
There is no functional difference between the remote and local SQL server. Generally, the requests to the local SQL server will be processed faster. The local server uses the resources of your local machine, since the remote SQL server will use separate resources - RAM, CPU etc. Using remote SQL server is useful in cases of host failures. If somehow your current host goes down and the SQL server is on the same machine your website/intanet will not be accessible.
The tes/dev project could be again on the same or another server ( for another server you should use Remote Desktop Connection).
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