Joshua Haiar/South Dakota Searchlight
SIOUX FALLS — A member of the artificial intelligence data center industry said Monday that South Dakota’s lack of incentives makes the state less competitive for development.
Data centers house powerful computer systems designed to store, process and analyze massive volumes of data.
Nick Phillips is the executive vice president of external affairs for Applied Digital, which is headquartered in Texas. He spoke at a Rotary Club of Downtown Sioux Falls panel on AI infrastructure. The company is proposing a multi-billion-dollar data center in Deuel County in the northeastern part of the state, and has already built one in North Dakota.
Phillips said North Dakota provides sales tax exemptions.
“In North Dakota, they exempt the computer equipment, cooling equipment, batteries, things like that,” he said.
Phillips said the lack of similar incentives in South Dakota means building a data center here can cost up to $400 million more than building the same facility in North Dakota. He said North Dakota is one of 36 states that offers tax breaks on data center equipment.
Phillips’ concerns echoed the debate during last winter’s South Dakota legislative session over a failed bill that would have provided sales tax refunds on data center equipment.
“These projects are going to other states right now,” said the bill’s sponsor, then-Sen. David Wheeler, R-Huron, who has since resigned to become a judge.
The bill, which failed 17-18 in the state Senate, would have provided sales tax refunds for data centers. The refunds would have applied to items such as computer hardware, servers, routers, cooling and power systems, backup generators, battery systems and more.
During debate in the Senate, supporters of the bill described it as a way to provide “regulatory certainty” that developers need for large-scale projects.
Sen. Taffy Howard, R-Rapid City, voted against the bill and noted that South Dakota already offers a sales tax refund program administered through the Governor’s Office of Economic Development. The program requires developers to apply for a rebate. Wheeler said at the time that a guaranteed refund in law would provide more certainty than a program with an application process.
Other opponents, including Sen. Mykala Voita, R-Bonesteel, raised concerns about tax fairness, energy consumption and the cost to the state.
“We’re always so focused on giving breaks to big companies that can afford it that we forget the people that pay the big lump sum of our state budget,” she said. “So, consider that, please.”
Phillips said South Dakota has other attributes that make it appealing — including a cold climate that cuts down the cost of cooling a room full of hot servers, and abundant wind energy, which is considered one of the most cost-effective renewable energy sources, to help keep operating costs down.
He also highlighted the potential economic impact. Phillips said the North Dakota data center will pay $2.1 million annually in property taxes.
“In Ellendale, North Dakota, in about a year or so, we will be about five times larger than the next largest property tax payer in the county,” he said.
Applied Digital’s proposed data center near Toronto in Deuel County would use about 150 megawatts to start and could eventually use about 400 megawatts. Another company is proposing a 50-megawatt data center in McPherson County, near Leola. Phillips said it takes about 20 megawatts to run a city like Madison.
Nationally, the massive power usage of data centers has caused concerns about demands on the electrical grid and about the impacts to climate change from the use of fossil fuels to produce the electricity.
While data centers’ contribution to climate change did not come up during the panel, Phillips told South Dakota Searchlight “somebody is going to create services like this.”
“And it can be done in places where there are environmental controls, such as here,” he said. “Or it can be done in places that maybe don’t care so much, like China or other countries without controls in place.”