Makenzie Huber, Joshua Haiar/South Dakota Searchlight
The race for governor is on in South Dakota, and so is the race to determine the state’s policy on data centers before the next governor is elected.
State Rep. Kent Roe, R-Hayti, wants to pass a bill this winter to spur the development of large data centers in South Dakota by giving them a local and state sales tax exemption on equipment and software purchases. He wants to do it before the June primary election, when a Republican candidate who doesn’t support tax breaks for data centers could win the party’s nomination.
“With any potential administrative change, they’re going to want to put their own stamp on the procedure and they’re going to assert their authority,” Roe said.
There will be “all kinds of posturing regarding data centers” during this winter’s legislative session because of the upcoming elections, Roe said. He’s heard data centers called the “devil, the mark of the beast and all of these apocalyptic things.”
Rooms or buildings full of computer servers have been storing cellphone pictures, emails and social media accounts for years. What’s new are 100- to 1,000-acre warehouses full of servers for cryptocurrency and artificial intelligence. Those massive data centers, needing 30 to 1,000 megawatts of energy, have electricity consumption equivalent to 29,000 to 800,000 residential customers.
South Dakota’s biggest data center consumes 30 megawatts, and the state has none of the vastly larger data centers that have proliferated elsewhere. Some of South Dakota’s elected officials question whether the state should incentivize the industry as many other states have, due in part to the massive energy demands of large data centers and the potential impacts on the availability and cost of electricity for other customers.
At least 37 states offer some sort of data center incentive, according to the National Conference of State Legislatures.
An April 2025 report by the nonprofit Good Jobs First — which promotes “corporate and government accountability in economic development” — said there were 10 states that each granted more than $100 million of sales tax exemptions for data centers in the prior year. Texas and Virginia exempted about $1 billion each, and Illinois exempted $370 million.
Legislation details, data center proposals
The sales tax exemption in Roe’s bill would run for 50 years. Eligibility would be determined by the state Department of Revenue.
While data centers would receive sales tax exemptions on hardware and software purchases, they would still pay the state’s 4.2% sales tax on the electrical service they receive from their provider. Data centers would also pay any applicable local sales taxes on electricity.
Data centers would be required to have an electric service agreement that avoids shifting costs to other utility customers, and would be required to notify local water providers to ensure consumption is compatible for the location. Cooling systems that prevent data center servers from overheating often use large amounts of water. In 2023, U.S. data centers consumed about 17 billion gallons of water, according to a Berkeley Lab report commissioned by the U.S. Department of Energy.
Roe’s bill excludes data centers used for the mining of cryptocurrency, which is digital currency secured by cryptography. Cryptocurrencies such as bitcoin are “mined” into existence by continuously running computers solving complex numerical problems.
Projects proposed in SD
The push for data center incentives and the race for governor could influence pending proposals to build large data centers in the state.
On Jan. 5, the Sioux Falls City Council approved the rezoning needed for a proposed site on the edge of the city that would be developed for a data center to occupy. The company, Gemini, estimates it will spend up to $1.9 billion to develop the site for a 500-megawatt data center. Opponents tried unsuccessfully to petition the decision to a citywide referendum election.
Meanwhile, a 430-megawatt, $5 billion data center is proposed in the Deuel County town of Toronto.
The Toronto project could generate over $10 million per year in state sales taxes on its electrical service, according to the company proposing the project, Applied Digital. The project could also result in a total of $5.5 million in property taxes annually for Deuel County and Deubrook School District. Nick Phillips, vice president of the company, said the state would bring in about another $19 million in one-time sales taxes associated with site development and construction.
The company loosely estimated $500 million in sales tax relief from Roe’s bill each time the data center updates its billions of dollars worth of hardware and software inside the building. That could happen every four to six years or so.
“But remember, that’s sales tax revenue the state is currently not getting,” Phillips said.
Other South Dakota communities are also taking actions that could aid data center development. The Madison City Commission greenlit an incentive program for data centers in November with Heartland Energy, hoping to attract cryptocurrency operations to the city by providing discounted energy rates, according to the Madison Daily Leader.
The largest data center already operating in South Dakota is a 30 megawatt facility near Onida. The project is planned to expand to 300 megawatts in the next few years, according to owner Big Watt Digital.
Where the candidates for governor stand
The race for the Republican nomination for governor includes Gov. Larry Rhoden, of Union Center — who is serving the remainder of former Gov. Kristi Noem’s second term after she departed to serve in the Trump administration — plus U.S. Rep. Dusty Johnson, of Mitchell, Aberdeen businessman Toby Doeden, and state House Speaker Jon Hansen of Dell Rapids. The primary election in June will come on the heels of the annual legislative session, which ends in March.
Johnson says South Dakota needs a “builder” and fewer of what he calls “BANANAs” — people who want to “Build Absolutely Nothing Anywhere Near Anything.” He’s been traveling the state promoting his “Data Centers Done Right” initiative.
Johnson has said data centers will help the U.S. win the artificial intelligence race, bring new industry and skilled jobs, provide steady demand for utilities, grow property-tax revenue for the counties where they’re located, and raise sales tax revenue for the state.
Johnson’s initiative says South Dakota should welcome data center projects that meet qualifications, including protections so they don’t drive up electricity or water rates, requirements to create good-paying jobs, and expectations that the centers deliver substantial property, gross receipts and energy-related tax revenue. The initiative does not include specifics on instituting those guardrails.
At a “Data Centers Done Right” roundtable in October, seated next to Roe, Johnson criticized Rhoden’s administration for not delivering on data incentives during the 2025 legislative session. Johnson said he supports Roe’s bill. Rhoden’s office of economic development spoke against a sales-tax exemption bill for data centers last winter, and the legislation failed.
“We need leaders willing to be the tip of the spear, charge forward, and bring that consensus into clarity, not wait for it to develop,” Johnson said.
Rhoden’s Governor’s Office of Economic Development commissioner, Bill Even, told South Dakota Searchlight that his office does not plan to testify on Roe’s bill, instead “letting the legislative process move forward.”
Rhoden said he is “focused on getting things done,” pointing to a data center roundtable he convened in September. He encouraged attendees to “come to consensus on a plan to do exactly what Dusty says he is doing.”
“Although, I will say, I’ve seen his plan and the stuff he is suggesting in there, we already do,” Rhoden said of Johnson’s “Data Centers Done Right” initiative. “It was really kind of a framework.”
Hansen has criticized tax incentive programs.
“Handing out taxpayer dollars to out-of-state corporations isn’t pro-business; it’s picking winners and losers at the expense of our own people,” he told South Dakota Searchlight.
Hansen does not support the data center sales tax exemption bill.
Hansen and Senate President Pro Tempore Chris Karr, R-Sioux Falls, recently unveiled their “Data Center Bill of Rights,” aimed at large data centers.
The two said the bill would bar new state sales tax breaks for data centers, protect utility customers from rate hikes caused by large power demands, require compatibility with local water supplies, and preserve local control over siting.
“Why would we be subsidizing some of the richest tech billionaires to build these data centers?” Hansen said. “If they want to come to South Dakota, they can come here and do that, but we don’t think we should be having to subsidize these data centers.”
Doeden said he agrees with President Donald Trump that the U.S. should dominate artificial intelligence — and that means building data centers — but “they have to come here on our terms.”
“I will grow this economy more than any governor in the history of this state,” Doeden said. “We don’t have to subsidize for-profit data centers.”
Opposition, other bills
Some South Dakotans are not convinced data centers are good for the state, and they’ll be lobbying lawmakers during this year’s legislative session.
Richard Bell is an engineer living in Rapid City, and a board member of the grassroots advocacy nonprofit Dakota Rural Action. It signed a letter from over 100 groups nationwide calling on Congress to halt data center construction until certain policies and regulations are put in place.
The letter says artificial intelligence is leading to more job loss and driving greater economic inequality. The groups call the artificial intelligence and cryptocurrency boom a major environmental threat because of its high electricity use, driving more fossil fuel pollution that further warms the planet.
Other legislators have their own ideas about how to regulate data centers. Sen. Taffy Howard, R-Rapid City, introduced two bills recently.
“There’s a big push to have data centers in South Dakota,” Howard said. “Before we jump on that bandwagon, we have to have common sense guardrails to protect our way of life and quality of life.”
One bill would limit “nuisances” caused by data centers by restricting the facilities from being built within a mile of a residential area and prohibit them from exceeding 45 decibels of noise at the nearest residential property line, which is equivalent to the humming of a refrigerator. Eighty-five decibels can cause hearing damage.
Another would define “large use customer” as an electric customer with at least 2 megawatts of demand and set regulations for water and electric use. The bill requires utilities to set rates for large-load customers to protect other customers from rate increases, requires a closed-loop cooling system, and requires regular water and electric use reports, among other regulations.
Howard said the state Public Utilities Commission is already working to ensure South Dakota energy rates for existing customers aren’t unduly raised because of large-use customers coming online.
“We’re doing the right thing, but there’s nothing requiring that in statute,” Howard said. “I think it’s important to have that in statute.”
The Public Utilities Commission is supporting a data center bill of its own. It would allow the commission to require data centers over 10 megawatts to pay for certain reviews associated with assessing those projects.