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Hyperscale data centers will not be exempt from sales taxes in South Dakota following the defeat of a bill Wednesday morning that would have granted them 50 years of exemptions.
House Bill 1005 would have put the state in line with about 40 other states that don’t tax the hardware and software used by large-scale data centers. Supporters of exempting data centers argue they require as much as $1 billion to $2 billion in investment. Adding a 6.2 percent state and local sales tax to that investment makes South Dakota uncompetitive with other states.
The sales tax exemption would have applied to any project started in the next 10 years.
Rep. Kent Roe, the bill’s sponsor, said people’s lives regularly touch data centers when they do routine tasks such as using cellphones or the Internet. While Roe said his bill would exempt data centers from sales taxes, they would still pay hundreds of millions of dollars in property taxes and sales taxes on energy usage.
Kent Roe
“Property tax revenue will be immense, especially for rural South Dakota,” said Roe, a Republican from Hayti. Applied Digital is considering a data center in Roe’s legislative district in Toronto.
Steve DelBianco, the president of NetChoice, an industry trade association whose members include some of the biggest names in the tech industry, including Amazon, Meta, and Google, told lawmakers that he came to South Dakota six years ago to support a similar measure. But lawmakers and the Noem Administration weren’t interested.
Since then, all of South Dakota’s neighbors have enacted similar exemptions, and they have data centers. Those can bring 200 skilled jobs and hundreds of millions in revenue.
“This should not be a hard decision,” he told lawmakers on the House State Affairs Committee.
With the exception of one crypto currency mining data center north of Pierre, the industry has passed by South Dakota, DelBianco said. That’s because it would be “fiscally irresponsible” for a company to invest a billion-dollar data center in a state that doesn’t offer incentives when its neighbors do.
“We have to pick the states that welcome through their policy,” he said.
The bill had the support of industry groups, business groups, local officials, and Otter Tail Power Co., which would supply electricity to the proposed Toronto data center. Travis Schaunaman, the mayor of Aberdeen, told the committee that his community has seen a boon in economic activity because of a data center being built in nearby Ellendale, North Dakota. Aberdeen had lost some major employers in recent years and saw a decline in sales tax revenue, but the Ellendale data center had reversed those trends.
But opponents worried that data centers would bring negative impacts, particularly in rural parts of the state. Erik Oftedahl, a volunteer firefighter for Toronto, said his department had neither the staffing, training nor equipment to handle 20-acres of computers on fire.
His wife, Michelle Oftedahl, told the committee that she was a fifth-generation farmer on land her family had owned for more than a century. She said her 16-year-old daughter was showing interest in becoming a sixth-generation farmer.
But Oftedahl said she was worried that once a data center moves into an area where land is inexpensive, wealthy speculators would buy land around the data centers in anticipation of growth. That would hurt the next generation of farmers.
“Land that is considered low-cost to them is completely out of reach for our young farmers,” she said.
Sara Steever, a retired chief technology officer in Lennox, told lawmakers that tech companies supporting data centers were worth billions and trillions of dollars. South Dakota didn’t need to offer tax exemptions, she said, because there are energy shortages in other parts of the country, forcing the companies to look elsewhere.
“The companies don’t need tax breaks,” she said. “They need connectivity, which we already have.”
When it came time for committee action, Rep. Greg Jamison, R-Sioux Falls, tried to amend the bill, offering a tiered structure that would grant exemptions from 10 years to 35 years based on their size and their number of employees. The amendment was defeated.
Rep. Eric Emery, D-Rosebud, made a motion to send it to the floor without a recommendation. That also failed.
When it came to the meat of HB 1005, Rep. Tim Reisch noted that the exemption wouldn’t hurt the state – “100 percent of zero is zero,” he said – and that the industry would provide communities with property tax relief. Data centers are in North Dakota, and Reisch noted that Gevo, which was set to build a jet fuel plant in his district, relocated to North Dakota after South Dakota rejected the carbon sequestration industry.
“I think it’s embarrassing. North Dakota is kicking our butt here,” he said.
Speaker of the House Jon Hansen questioned a provision in the bill that required the secretary of the Department of Revenue to determine if a data center qualified for tax exemptions. The secretary was supposed to ensure that a data center’s energy usage wouldn’t shift costs to other rate payers. Hansen questioned how the secretary would be qualified to make that decision.
Hansen also noted that the bill made secret the information the secretary used to make that determination.
“The people aren’t entitled to see any documentation that goes into that decision,” he said. “I think that’s wrong.”
Hansen also said that South Dakota entrepreneurs had invested billions into the state without similar exemptions. If businesses want to come to the state, they should do so because South Dakota prioritizes low regulation and free markets.
“They are some of the largest companies in the world, and I think we should prioritize our people over the largest tech companies in the world,” Hansen said.
The bill was killed on a 9-3 vote. However, lawmakers conceded it could be revived on the full House floor in a smoke out.
