Indiana’s Sales Tax Exemptions for Data Centers: A Growing Debate

Back in 2019, Indiana’s Legislature rolled out a bill aimed at giving hefty sales tax exemptions to qualifying data centers. This legislation allows high-tech facilities filled with advanced servers to sidestep the state’s 7% tax when buying equipment and energy.

This move has significantly benefited major tech corporations that quickly set up data centers, with strong backing from powerful trade associations. Other states have followed suit, and nearly every state that imposes a sales tax now offers some kind of exemption for data centers. This includes items like computers, cables, air conditioning units, and, in certain instances, even the power needed to run everything.

When Indiana’s law was enacted, demand for data center space was already on the rise but has surged dramatically, thanks in part to the AI boom triggered by OpenAI’s ChatGPT in 2022. Some estimates suggest that the industry could be worth $1 trillion by 2027, according to a report from PwC.

A CNBC study indicates that, in the quest to draw in massive data centers, the state has forfeited hundreds of millions in tax revenue. Names like Amazon, Meta, and Google, each boasting market capitalizations exceeding $1 trillion, have been significant beneficiaries of these exemptions.

Tax credits have been a longstanding tool for states to attract businesses. However, watchdog groups argue that the trade-offs are murky. These facilities don’t typically create numerous jobs, but they can demand enormous amounts of electricity.

The increasing number of tax breaks has sparked intense discussion regarding whether big corporations should enjoy such lavish incentives.

CNBC’s analysis reveals that 42 states either provide full or partial sales tax exemptions for data centers, or they don’t have any sales tax at all. Of those, 37 states have specifically enacted laws for data center sales tax exemptions, totaling nearly $6 billion in exemptions over the past five years. Interestingly, the other 21 states that offer similar benefits have not publicly disclosed how much money in tax credits they’ve distributed, hence they’re not included in that $6 billion total. Meanwhile, eight states that do implement sales taxes don’t grant any exemptions for data centers.

Only four states—Illinois, Nevada, Missouri, and Washington—publish the details of these exemptions. For instance, CNBC found that an Illinois Microsoft data center received over $38 million in sales tax exemptions but created just 20 permanent jobs. In Washington, the company secured $333 million in sales tax exemptions for its data centers from 2015 to 2023.

Microsoft opted not to comment on the tax incentives or associated job creation linked to its data centers in these states.

Other states, however, often do not provide detailed information. Virginia, for example, has a suspended exemption exceeding $730 million for the fiscal year 2024, but lacks a breakdown of recipients.

It’s also somewhat unclear which companies are pursuing these tax reductions. Just this year, a limited liability company named Hatchworks applied for an Indiana sales tax exemption; it’s noted that Hatchworks is a subsidiary of Google.

A Google spokesperson indicated that using third-party LLCs until project specifics are confirmed is a common industry practice for economic initiatives.

Greg Leroy, director of the nonprofit research group Good Jobs First, which advocates for transparency in economic development, noted that it’s mainly the big tech firms that gain here. He remarked, “There was a huge transfer of wealth from taxpayers to shareholders.” He cautioned that some states, like Virginia, could face annual losses reaching $1 billion.

Northern Virginia, recognized as a leading hub for data centers, has investigated the economic impact of these sales tax exemptions. A 2024 study by the Virginia Joint Legislative Audit and Review Board (JLARC) indicated that, on average, the state generated only 48 cents in new revenue for every dollar it didn’t collect in sales tax between 2014 and 2023.

Remarkably, that 48 cents is more than many other industries with sales tax exemptions that aim to stimulate economic activity. The report suggests that one reason data center incentives yield better results is that they are usually tied to job creation—something most other exemptions don’t necessitate.

The Virginia Economic Development Partnership, responsible for economic growth in the state, declined to comment but referred to the JLARC report. This disclosed that the state’s data center exemptions were classified as providing “moderate economic benefits,” though they often don’t pay themselves off.

Leroy characterized the situation as a “taxpayer loss proposal,” warning that without taxes, public service quality could decline, or taxes may need to be increased elsewhere.

Steve Delbianco, CEO of the tech trade association NetChoice, suggested that collecting some tax revenues is better than none. He explained that the state decided to exempt equipment purchases to attract more data centers and, as a result, still manages to retain half the sales tax it anticipated relinquishing.

Delbianco posited that data centers are vital for economic growth when lobbying for companies such as Meta, Google, and Amazon.

According to a 2024 JLARC report, Virginia enjoyed 50,700 jobs and a $7.2 billion economic contribution between 2021 and 2023, while other states collectively created only 12,100 jobs and added $1.3 billion to the economy during the same period. Over the years 2014 to 2023, data center incentives generated more economic benefits than all other development incentives combined, largely due to the construction phase of these facilities.

Former U.S. Representative Barbara Comstock, who played a significant role in the data center’s sales tax exemption when the legislation was passed in 2012, emphasized during her 2019 testimony in Indiana that she viewed these exemptions as crucial for attracting investment, creating jobs, and boosting local tax revenue.

In Indiana, the consumer advocacy group Citizen Action Coalition is keeping a close eye on the sales tax exemptions allotted to data centers. Program director Ben Inskeep pointed out that Indiana extends some of the nation’s most generous subsidies, including tax exemptions on energy and equipment for data centers investing over $750 million, lasting for up to 50 years.

Inskeep mentioned that when the sales tax exemption was introduced in 2019, lawmakers were anticipating multi-billion dollar tax cuts, not realizing that large tech firms would construct extensive data centers, which produce very few permanent jobs.

A report from the U.S. Chamber of Commerce in 2017 reviewed financial data from ten major companies owning 244 large data centers across 16 states. The report indicated that, during the construction phase, these centers employed an average of 1,688 workers, but once operational, they only provided about 157 permanent jobs.

In a comparison, a study from 2020 conducted by two economics professors found that between 2002 and 2017, aerospace and automotive industries benefiting from specific corporate exemptions promised over 2,700 jobs. However, unlike data center figures, which are based on actual employment, the numbers in these other sectors were based on corporate predictions linked to incentive contracts.

The study concluded that while there was some evidence of direct employment gains from attracting businesses, strong evidence showing that company-specific tax incentives lead to broader economic growth was lacking.

Regarding energy consumption, Virginia’s audit forecasted a “severe increase in energy demand” as the data center industry expands. It projected that the state’s electricity requirements could double within the next decade, mainly due to data centers.

The report cited that a small data center in Virginia uses as much energy as 4,500 homes, while the largest new centers consume more energy than many industrial clients.

Currently, state data centers are covering their entire energy costs, but the report warned that the increase in demand is likely to drive up expenses for other customers.

Inquiries to Amazon, Apple, Google, Meta, Microsoft, OpenAI, and Oracle for comments have been made.

Representatives from Amazon, Google, Meta, and Microsoft indicated they are working alongside utility companies to manage the costs associated with the growth driven by data centers.

Additionally, these companies affirmed that they are investing in sustainable energy solutions such as wind, solar, and nuclear power.

Amazon highlighted its contributions, stating it donated $460 million in property taxes and fees related to data centers in three Virginia counties in 2023. Furthermore, the company has invested over $75 billion in the state since 2011.

Meanwhile, Apple, OpenAI, and Oracle have yet to respond to multiple requests for comments.