In short
Texas exempts qualifying data centers from state sales and use tax on equipment, electricity, and certain other purchases. Tex. Tax Code § 151.359, Tex. Tax Code § 151.317(a)(9) A facility must be certified by the Texas Comptroller and meet specific investment, job creation, and size thresholds. There are two tiers. A qualifying data center under § 151.359 needs a $200 million capital investment and 20 full time jobs. It gets a 10 to 15 year exemption on the 6.25% state tax only. Tex. Tax Code § 151.359 A qualifying large data center project under § 151.3595 needs a $500 million investment, 40 jobs, and a contract for 20 megawatts of transmission capacity. It gets a 20 year exemption on both state and local sales taxes. Tex. Tax Code § 151.3595, 34 Tex. Admin. Code § 3.335 Both tiers can also buy gas and electricity exempt from state sales tax for AI data center operations. Tex. Tax Code § 151.317 The exemption cost Texas an estimated $3.2 billion over the next two years, up from $14.6 million for the 2014-15 biennium, when it began. Texas Tribune, Texas Senate interim charges The Senate Finance Committee will hold a hearing in July 2026 and is expected to propose changes in the 2027 legislative session. 2026 Senate Interim Charges, Texas Tribune, El Paso Matters
How did the exemption start?
Texas created the AI data center sales tax exemption in 2013 through House Bill 1223. HB 1223 Lawmakers wanted to attract large server farms that would bring jobs and capital investment. The original law set one tier, called a qualifying data center, with a $200 million investment and a 20 job floor. In 2015 the legislature added a second, larger tier named a qualifying large data center project, with higher requirements but a longer exemption that covers local tax too. 34 Tex. Admin. Code § 3.335 The Comptroller of Public Accounts runs the program. Over 120 facilities now claim the break. Texas Tribune
What are the two tiers of the exemption?
The table below compares the key numbers for each tier. Both require the facility to be used by a single qualifying occupant (not a telecom provider) and to have backup power, fire suppression, and physical security.
| Requirement | Tier 1 Qualifying data center (§ 151.359) | Tier 2 Qualifying large data center project (§ 151.3595) |
|---|---|---|
| Minimum square footage | 100,000 sq ft in a single building | 250,000 sq ft on one or more buildings on a single or contiguous parcel |
| Minimum capital investment | $200 million over five years | $500 million over five years |
| Minimum qualifying jobs | 20 full time | 40 full time |
| Exemption duration | 10 years if investment is under $250 million, 15 years if $250 million or more | 20 years |
| Taxes exempted | State sales and use tax (6.25%) | State and local sales and use taxes |
| Additional requirement | None | Contract for at least 20 megawatts of transmission capacity |
Tex. Tax Code § 151.359, Tex. Tax Code § 151.3595, 34 Tex. Admin. Code § 3.335
The tier 2 exemption’s coverage of local tax can add a significant saving. In many Texas cities the combined state and local rate is 8.25%, so the local portion is up to 2%.
The exemption does not apply to real estate or improvements. It covers only tangible personal property and services that are necessary and essential to the AI data center’s operation.
What is a qualifying job?
A qualifying job is a new, permanent, full time position located in the same county as the AI data center. The employee must work at least 1,820 hours per year. The wage must be at least 120% of the county average weekly wage published by the Texas Workforce Commission. The job cannot be moved from another Texas county and must exist for at least five years. If a position becomes vacant, the operator must fill it within 120 days. Third party staffed roles count as qualifying jobs if they meet the same requirements as directly employed qualifying jobs and a written contract between the third party employer and a qualifying owner, qualifying operator, or qualifying occupant provides that the position is permanently assigned to an associated qualifying data center or qualifying large data center project. 34 Tex. Admin. Code § 3.335, 34 Tex. Admin. Code § 3.335
For example, if the county average weekly wage is $800, the AI data center job must pay at least $960 per week. This figure varies widely across Texas, so sponsors should check the current number early in site selection.
What counts as capital investment?
Capital investment means the amount paid to acquire assets that, for federal income tax purposes, are Section 179, Section 1245, or Section 1250 property. In plain terms it is the servers, cooling systems, generators, networking equipment, and similar hard assets bought to equip the facility. It excludes purchases made before the exemption’s effective date, purchases from related parties, operating leases, and routine maintenance. 34 Tex. Admin. Code § 3.335 The investment must occur within five years of the Comptroller’s certification date.
What equipment and supplies are exempt?
The exemption covers items that are necessary and essential to run the AI data center. The list includes electricity, cooling systems, emergency generators, servers, data storage devices, network connectivity gear, racks, cabinets, raised-floor systems, peripheral components, software, and mechanical, electrical, or plumbing systems that support those items. Comptroller Data Centers page
It does not cover office equipment or supplies, maintenance or janitorial supplies or equipment, equipment or supplies used primarily in sales activities or transportation activities, tangible personal property on which the purchaser has received or has a pending application for a refund under Section 151.429, tangible personal property not otherwise exempted under Subsection (b) that is incorporated into real estate or into an improvement of real estate, tangible personal property that is rented or leased for a term of one year or less, or a taxable service performed on tangible personal property exempted under this section. Tex. Tax Code § 151.359 A project cannot use the exemption for assets that already received an enterprise project refund under § 151.429.
How do you apply for the exemption?
The facility must first be certified by the Comptroller. The applicant files Form AP-233 for a qualifying data center or Form AP-236 for a qualifying large data center project. The applicant must hold or have applied for a Texas Sales or Use Tax Permit or a Texas Direct Payment Permit. 34 Tex. Admin. Code § 3.335 Once approved, the Comptroller issues a registration number. The exempt buyer then gives Form 01-929 to vendors to make tax free purchases. The exemption begins on the certification date, no refunds are available for purchases made before that date.
What ongoing requirements does a certified AI data center have?
At the five year anniversary of certification, the Comptroller audits each AI data center. The audit verifies capital investment, qualifying jobs, and for qualifying large AI data center projects the transmission capacity contract. 34 Tex. Admin. Code § 3.335 Each year the operator must also file a job creation report on Form 01-160, with a supplement on Form 01-161 if needed. If the comptroller determines the AI data center does not meet the requirements prescribed by Subsection (d), the comptroller shall revoke all registration numbers. Each person whose registration number is revoked then owes taxes, including penalty and interest from the date of purchase, on purchases for which the person claimed an exemption under this section. Tex. Tax Code § 151.359, Tex. Tax Code § 151.359
Does the exemption cover electricity and natural gas?
Yes. A certified AI data center can buy gas and electricity free of state sales tax when the power is used directly in processing, storage, and distribution of data. Tex. Tax Code § 151.317 For large data center projects, the local sales tax on these utilities is also exempt. To claim this benefit the operator must provide a predominant use study, unless the data center is in a standalone building occupied solely by the qualifying occupant.
But two important limits apply. First, an AI data center that has a Chapter 313 agreement limiting its appraised property value cannot also claim the gas and electricity exemption. Tex. Tax Code § 151.317(k) Second, the Comptroller has ruled that hydrogen is not gas for purposes of this exemption, so purchases of hydrogen or hydrogen fuel cells to power an AI data center remain taxable. STAR Private Letter Ruling 202511012L
Why is the tax break under review in 2026?
The fiscal cost of the exemption has grown far beyond original projections. When HB 1223 passed, the state estimated a revenue loss of $14.6 million over the 2014-15 biennium. Texas Tribune The comptroller’s office estimated Texas will lose $3.2 billion in sales tax revenue over the next two years from the AI data center exemption. Texas Tribune The Comptroller projects $3.3 billion for 2028-29 and an annual cost approaching $1.8 billion by fiscal year 2030. 2026 Senate Interim Charges, Texas Tribune
Senator Joan Huffman, chair of the Senate Finance Committee, has called the growth unsustainable and said she plans to look at filing legislation to either repeal the exemption or take a very close look at it. Texas Tribune The House and Senate have issued multiple interim charges that study the impact of AI data centers on water, the electric grid, and local communities. House Interim Charges, Senate Interim Charges A formal Senate Finance Committee hearing is scheduled for July 2026. El Paso Matters
How should developers and lenders approach the exemption today?
The exemption is still valid and the Comptroller continues to issue certifications. But the political risk is high and a change in 2027 is likely. A sponsor can take several practical steps.
- Certify early. If a project is far along, seek certification before the 2027 session begins. The exemption starts on the certification date and the Comptroller is processing applications now.
- Model the tier 2 upside. A project that can cross the $500 million investment threshold gains the local tax save and a 20 year runway. Because local tax rates in many Texas counties approach 2%, the combined benefit is material.
- Plan for a repeal scenario. It remains uncertain whether the legislature would apply a repeal to already certified facilities, and no protection against a retroactive change is guaranteed. A cautious model assumes that future purchases after a future effective date could be taxable.
- Watch the wage floor. The 120% county average wage rule can create a surprisingly high bar in some counties. Verify the current Texas Workforce Commission figure for the county and compare it to actual staffing costs.
- Avoid the Chapter 313 trap. If a project receives a Chapter 313 property tax value limitation, it cannot claim the electricity and gas exemption. This trade-off should be evaluated early.
- Local sentiment matters. Several Texas cities have seen grassroots movements pressuring local officials to block data center projects, including San Marcos, College Station, and Harlingen. Texas Tribune Developers should expect more scrutiny from both state and local officials.
Key takeaways
- Texas offers two tiers of sales tax exemption for AI data centers, a base tier (state only, 10 to 15 year) and a large project tier (state and local, 20 year).
- The thresholds are $200 million or $500 million in capital investment, paired with 20 or 40 qualifying jobs that pay at least 120% of county average weekly wages.
- Electricity and gas used to power the servers are also exempt, but not if the facility also holds a Chapter 313 property tax limitation.
- Certification is the trigger, no pre-certification refunds apply, and a five year compliance audit follows.
- The exemption’s cost has grown from $14.6 million per biennium to over $3.2 billion, prompting a Senate Finance hearing in July 2026 and likely legislation in 2027.
- New projects should factor the risk of repeal or significant revision into their financing and site decisions.
Frequently asked questions
Q:What is the Texas state sales tax rate and how much does the exemption save?
A:The state rate is 6.25%. Local rates can add up to 2%, making the combined rate as high as 8.25%. Tier 1 exempts only the state portion. Tier 2 exempts the full combined rate on qualifying purchases, including equipment and utilities.
Q:Can a colocation AI data center qualify?
A:Yes, so long as there is a single qualifying occupant who does not sublease space, and all other requirements are met. The occupant does not have to be the owner. Several large colocation operators, like Stream Data Centers and CyrusOne, have certified facilities where the tenant is the qualifying occupant.
Q:How long does Comptroller certification take?
A:The Comptroller does not publish a fixed timeline. The application requires detailed documentation of the project plan, investment commitment, job projections, and the site. Early and complete filings move faster. Sponsors should expect a multi month process.
Q:What happens if we do not meet the job or investment numbers by the five-year audit?
A:If the comptroller determines a qualifying data center does not meet the requirements of Subsection (d), the comptroller shall revoke all registration numbers issued in connection with that data center, and each person whose registration number is revoked is liable for taxes, including penalty and interest from the date of purchase, on purchases for which the person claimed an exemption under this section. Tex. Tax Code § 151.359, Texas Comptroller The revocation applies to all registration numbers for that data center, so the risk extends to every purchase made under the exemption.
Q:Can an AI data center use renewable energy and still claim the electricity exemption?
A:Yes, the electricity exemption looks at how the power is used, not how it is generated. As long as the electricity powers data processing, storage, or distribution, the source does not matter. However, hydrogen is not considered gas for the data center exemption, so purchases of hydrogen and hydrogen fuel cells are taxable. STAR Private Letter Ruling 202511012L
Q:Does the exemption apply to construction materials and building improvements?
A:No, tangible personal property not otherwise exempted under Subsection (b) that is incorporated into real estate or into an improvement of real estate is excluded. Tex. Tax Code § 151.359 The exemption covers equipment, not the building itself.
Q:Is there an overall sunset date for the entire exemption program?
A:The exemption itself does not have a single statutory end date. Each certified facility receives a time-limited exemption that expires after 10, 15, or 20 years. The legislature can change or end the program at any session for future certifications.
Q:Can an AI data center with a Chapter 313 agreement later apply for the sales tax exemption?
A:A Chapter 313 agreement bars the facility from claiming the electricity and gas exemption. It does not expressly bar the equipment exemption, but the two programs are mutually exclusive for utility purchases, and the project’s structure must be reviewed carefully.
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.