South Dakota’s Data Center Crossroads

South Dakota finds itself at a curious crossroads, seemingly hesitant to fully embrace the digital frontier even as the world races ahead.

The state’s unique blend of natural advantages – a frigid climate perfect for cooling colossal computer systems and an abundance of wind energy to power them – appears to be undercut by a cautious approach to economic incentives, leaving industry leaders scratching their heads and, perhaps, taking their multi-billion-dollar projects elsewhere.

Such was the sentiment voiced by Nick Phillips, the executive vice president of external affairs for Applied Digital, a Texas-based company at the forefront of the artificial intelligence data center boom.

Speaking to the Rotary Club of Downtown Sioux Falls, Phillips painted a stark picture of South Dakota’s competitive disadvantage.

His company, which has already established a significant footprint in North Dakota, has proposed a multi-billion-dollar data center in Deuel County, in the state’s northeastern reaches.

But the path to development here, Phillips suggested, is significantly more arduous, and expensive, than in neighboring states.

The crux of the matter, according to Phillips, lies in South Dakota’s reluctance to offer sales tax exemptions on the specialized, high-tech equipment that forms the backbone of these data behemoths.

North Dakota, he pointed out, exempts everything from computer hardware and cooling systems to batteries.

The absence of similar breaks in the Mount Rushmore State could translate into an eye-watering $400 million additional cost for constructing an identical facility.

This isn’t a minor hurdle; it’s a monumental financial disincentive in an industry where every cent of operational and build-out cost is meticulously scrutinized.

Phillips noted that North Dakota is just one of 36 states actively wooing data center developers with such tax breaks, leaving South Dakota in a distinct minority.

This disparity isn’t news to state lawmakers, who grappled with precisely this issue during the most recent legislative session.

A bill, championed by then-Sen. David Wheeler of Huron, aimed to provide sales tax refunds for data center equipment – a legislative olive branch intended to level the playing field.

The proposed refunds would have covered the gamut of necessary components: servers, routers, power systems, backup generators, and more.

Yet, despite ardent pleas from its supporters, who argued for the “regulatory certainty” crucial for securing such massive investments, the bill ultimately faltered, defeated by a narrow 17-18 vote in the state Senate.

Wheeler, who has since resigned to become a judge, had warned presciently at the time, “These projects are going to other states right now.”

The legislative debate laid bare the philosophical divide gripping South Dakota’s approach to economic development.

Proponents of the bill, echoing Phillips, emphasized the need for a clear, statutory guarantee of tax relief, arguing it offered more predictability than the existing sales tax refund program administered through the Governor’s Office of Economic Development, which requires an application process.

For projects valued in the billions, certainty is not just preferred; it’s often a prerequisite.

However, opposition to the bill was equally fervent, rooted in concerns that resonate deeply with a state often proud of its fiscal conservatism and commitment to individual taxpayers.

Sen. Taffy Howard of Rapid City pointed to the existing refund program, suggesting it was sufficient.

More pointedly, Sen. Mykala Voita of Bonesteel articulated a widely felt sentiment regarding tax fairness.

“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,” Voita stated, encapsulating the apprehension that corporate incentives might come at the expense of ordinary citizens.

Concerns also surfaced regarding the immense energy consumption of data centers and their potential strain on the electrical grid, as well as broader environmental impacts from power generation.

Yet, Phillips maintained that South Dakota possesses inherent advantages that, if leveraged correctly, could make it a prime location.

The naturally cold climate significantly reduces the energy required for cooling vast server rooms, offering a substantial operational cost saving.

Furthermore, the state’s abundant wind energy provides a readily available, cost-effective, and renewable power source, aligning with growing corporate commitments to sustainability.

The economic ripple effect of such projects is undeniable.

Phillips cited the North Dakota data center, which is projected to pay $2.1 million annually in property taxes, becoming five times larger than the next largest property taxpayer in its county within a year.

The proposed Deuel County facility would initially consume around 150 megawatts of power, with potential expansion to 400 megawatts – a staggering amount, considering a city like Madison requires only about 20 megawatts.

Another company is eyeing a 50-megawatt data center in McPherson County.

The national conversation around data centers increasingly includes their enormous power demands and the associated environmental footprint.

While the specific climate impact didn’t dominate the Sioux Falls panel, Phillips offered a stark global perspective.

Someone, he argued, will inevitably build these services.

The critical question, then, is where they will be built.

“And it can be done in places where there are environmental controls, such as here,” Phillips asserted, “Or it can be done in places that maybe don’t care so much, like China or other countries without controls in place.”

This framing elevates the local debate beyond mere tax policy to a broader strategic choice.

Is South Dakota content to cede this burgeoning industry, and its associated economic benefits and technological advancements, to states and nations with more aggressive incentive structures, even if it means potentially pushing development to less environmentally scrupulous locales?

Or can the state find a path that balances fiscal prudence with proactive economic development, leveraging its natural strengths to carve out a unique niche in the global digital landscape?

The current impasse suggests South Dakota is still weighing the true cost of embracing, or rejecting, the future.