The data center industry still has a foot in the door in South Dakota. That’s after a bill advanced establishing incentives for projects that creates a “direct payment permit” for large projects could allow data centers to bypass a state sales and use tax.
A day packed with data center bills resulted in that and another bill offering protections for state electricity and water customers advancing out of committee.
Wednesday was deemed the “unofficial data center day” in Pierre. Across the House and Senate state affairs committees, lawmakers heard eight bills targeting the projects. Multiple bills were shot down by the Senate committee.
Some of those killed included Rapid City Sen. Taffy Howard’s bills. They included limits on nuisances caused by data centers, such as limiting the sound emitted to 45 decibels and establishing a one-mile setback to residences or residential communities, a bill altering provisions on large-use utility customers and a bill establishing a one-year moratorium on data centers in South Dakota.
All those bills met opposition by people representing proposed hyperscale data centers in Sioux Falls and Deuel County, along with electric utility companies and economic development enthusiasts. Arguments against the bill maintained that a lot of those decisions are better suited for local communities to decide, as opposed to at the state level. Many said Howard’s bills preempted local control.
However, proponents said because the issue is rapidly evolving, the state has an interest in creating a general set of guardrails around the projects.
The Senate State Affairs Committee shot down all three of Howard’s bills.
The panel did express interest in guardrails around data center water and electricity usage. The committee greenlit Senate Bill 135, sponsored by Sioux Falls Sen. Chris Karr. It requires all data center operators to pay for all electric costs, and bans passing additional costs onto residential customers. The bill also outlines water protections. Before operating, data centers would need to provide, in writing, the amount of water it intends to use to the local water supply and Board of Water Management. Data center operators would also need to submit a public semi-annual report on water usage to the Board of Water Management.
Almost all testifiers took zero issue with those provisions of SB 135. Tension on the bill largely came in a one-sentence provision: “The state, or any political subdivision of the state, may not authorize or grant any tax exemption to a data center.” More plainly, the state can’t exempt sales taxes on data center equipment, something the industry has said is vital to the industry’s existence in South Dakota. The industry claims operating in other states, like Minnesota, Iowa and North Dakota, is more cost-effective than South Dakota without the exemption. The House State Affairs Committee killed a bill providing such exemptions earlier this month.
Under SB 135, local tax incentives and the Governor’s Office of Economic Development’s existing sales tax rebates to data centers, through its Reinvestment Payment Program, are allowed to used by the industry.
Sen. Karr argued the state has enough on the table for data centers to buy in, so the Legislature doesn’t need to add another incentive.
“Let's recognize for a second the benefits of South Dakota, and what it's like to do business here,” Karr said. “We've protected Sout Dakota and its business landscape. We have no corporate income tax; we have no personal income tax; we have a competitive property tax structure. Historically, we are a business friendly, regulatory climate. We're a low-tax environment.”
On the other side of the coin, the tech industry argued it’s a simple cost-and-benefit analysis. Nick Phillips with Applied Digital, the company behind a potential data center in Deuel County, explained why they claim South Dakota is “too expensive” without a long-term sales tax exemption.
“It would cost roughly $2 billion more to build one of these facilities in South Dakota as compared to one of those other states in sales tax on all the equipment and everything else that’s collected,” Phillips, Applied Digital’s Executive Vice President of External Affairs, said.
Phillips pointed to the cost of sales tax on energy here costing more per year than North Dakota’s income tax, on top of the sales and use tax.
“You can actually never close that gap of that $2 billion because you’re actually paying more per year just on the sales tax on the energy itself,” Phillips told the committee.
Senate Bill 135 advanced out of committee on a 5-4 vote.
SB 135 comes alongside a bill that works in tandem with it, despite being brought forward by a different sponsor. As mentioned, Karr’s bill bans state sales tax exemptions for data centers but keeps the door open for the Reinvestment Payment Program, or RPP, and local incentives.
That’s where Sen. Casey Crabtree’s bill comes in.
It expands the Governor’s Office of Economic Development’s RPP. Senate Bill 239 adds a separate application for large projects, including–but not limited to—data centers. Large projects could receive a permit—if approved by GOED and then by 2/3 of the state Board of Economic Development—for up to 30 years of a state sales tax exemption.
The permit is contingent on the project successfully fulfilling what is outlined in the permit. If a company fails to do so, the Department of Revenue would have the authority to collect the tax dollars. GOED would conduct quarterly check-ins on such permits to ensure benchmarks and agreed upon terms are being fulfilled.
That's slightly different from the current RPP where companies pay sales and tax to the state, and if the project is completed successfully they are refunded those dollars.
Currently, the funds for such “large projects” aren’t determined in SB 239, but the state Board of Economic Development would adopt a policy that sets a minimum project cost that is set for a two-year period. It could be reevaluated and changed once those two years are up.
Sen. Crabtree outlines what Senate Bill 239 means for South Dakotans if made law.
“That incentivizes real jobs to be started here in South Dakota in all industries. That’s agriculture, that’s energy, that’s manufacturing,” Crabtree said. “This is part of stepping back into the golden age right now.”
The Senate State Affairs Committee killed two other bills Sen. Crabtree brought, both of which provided increased protections around electric rates for residential users and water usage by data centers. The committee opted for Karr’s bill instead since it had already advanced out of committee.
Crabtree told SDPB after the committee hearing that he believes “there is room to improve on the things that are out there” when asked if he feels comfortable in the protections around data centers approved so far.
“Clearly we want to make sure the hardworking folks of South Dakota are not paying any extra based on these developments,” Crabtree said,
Data centers proposed in the state spoke in favor of SB 239, saying there’s a future for the industry in South Dakota if it became law.
Senate Bill 239 advances out of the Senate State Affairs Committee after a 6-3 vote. It heads to the Senate.
On the House side, the House State Affairs committee advanced a bill prohibiting South Dakota government entities from entering into non-disclosure agreements with data centers. Proponents argue it creates transparency around projects pertaining to state dollars. Data centers opposed the bill. They largely said NDAs are signed early on to prevent unneeded anxiety and pushback on projects that may never come to fruition. When a path forward is determined, they argued then they’d release information pertinent to the public that would be heard at the local level during commission and board meetings. It advances to the House floor after a 9-3 vote in committee.
Lawmakers in the House State Affairs Committee killed a bill brought by Sioux Falls Democrat Rep. Erin Healy. House Bill 1301 required data centers to file an annual report on water and electricity usage, as well as requiring data centers to bear all costs of decommissioning. It included a statewide moratorium on data centers through 2027, which led to the largest opposition.
The House State Affairs Committee voted to kill the bill 10-2.
