Key Takeaways
- Texas lawmakers filed at least five bills on the first day of prefiling for the 2027 session to repeal the state sales tax exemption for data centers, including HB 167 and SB 293. By that evening, 23 of the Senate’s 31 members and members-elect had signed on to SB 293. The exemption was originally estimated to cost $14.6 million for the 2014-15 budget cycle and is now projected at $3.3 billion for 2028-29. Audits have found that six of the 20 facilities reviewed so far did not meet the law’s requirements.
- The bills would end the exemption for new projects and deny applications still pending with the comptroller on the effective date, but they appear to differ on the 138 facilities already certified. HB 167 would let existing certifications run until their terms expire. SB 293, as its author has described it, would end them on the effective date. Operators with certified projects should confirm they are meeting their job and investment commitments. They should also review tax pass-through and change-in-law clauses in leases, colocation agreements and power contracts to determine whether the landlord or the tenant would absorb the 6.25% tax.
- Scrutiny of data centers extends beyond taxes. The governor has paused ERCOT interconnection approvals and TCEQ permits for data center projects until an audit due in December is complete. Sen. Judith Zaffirini has filed bills that would require a Public Utility Commission permit before construction of computing sites of 75 megawatts or more and, as reported, would address infrastructure cost allocation, county authority, water-use reporting and local tax incentives. Developers with applications pending at the comptroller have the least time, since a project that isn’t certified by the effective date would receive nothing under HB 167 or SB 293 as announced.
The House and Senate bills both end the break for new projects. They appear to part ways on the 138 facilities that already have it.
Texas lawmakers started filing bills for the 2027 session on Monday, November 9, and by noon three of them proposed ending the state sales tax exemption for data centers. More than 1,000 bills came in that day. By evening at least five targeted the exemption, and one senator had filed a separate set of bills on state permits, electricity cost allocation, water reporting and local tax incentives.
HB 167, by Rep. Trey Martinez Fischer of San Antonio, is one of the five. It repeals Tax Code sections 151.359 and 151.3595, which create the exemption for data centers and for large data center projects, and it removes the related exemption for the electricity and gas those facilities buy. HB 408, HB 681 and HB 750 go after the same exemption. So does SB 293, filed by Senate Finance Committee Chair Joan Huffman of Houston. Twenty-three of the Senate’s 31 members and members-elect had signed on to her bill by Monday evening.
The exemption costs far more than the Legislature expected
The exemption dates to 2013, and lawmakers expanded it in 2015. To qualify, a data center needs at least 100,000 square feet, $200 million in capital investment over five years and 20 jobs that pay above the local average wage. In return it pays none of the state’s 6.25% sales tax on servers, cooling systems, generators, software and electricity for up to 15 years. A large project, at $500 million and 40 jobs, gets 20 years.
The original cost estimate was $14.6 million for the 2014-15 budget cycle. The comptroller’s office now puts the figure at $3.3 billion for 2028-29.
The Senate Finance Committee took testimony on July 27. The comptroller’s chief revenue estimator told senators that 138 data centers are certified for the exemption, 59 of them this year. Auditors have reviewed 20 facilities so far. Six didn’t meet the law’s requirements.
Regulators and the governor acted first
ERCOT told the Senate Business and Commerce Committee on April 1 that about 410 gigawatts of large loads were seeking to connect to the grid, 87% of them data centers. The queue was reported at roughly 63 gigawatts in late 2024.
Lawmakers passed Senate Bill 6 in 2025 to set interconnection standards and cost responsibilities for loads of 75 megawatts or more. The Public Utility Commission adopted its interconnection rule under that law in September.
The governor went further this year. In June he asked the Legislature to repeal the exemption and make data centers pay their own interconnection costs. In August he ordered an audit of every data center in ERCOT’s interconnection process and paused approvals until it’s finished. In September he told the Texas Commission on Environmental Quality to stop issuing permits for data center projects until the audit is done. ERCOT expects to finish in December.
The Senate package reaches past taxes
Sen. Judith Zaffirini of Laredo filed five bills on subjects other than the sales tax. SB 32 requires a Public Utility Commission permit before construction starts on a computing site of 75 megawatts or more, the same size cutoff Senate Bill 6 uses. The commission would work with state environmental regulators and look at planned water and energy use, environmental impact and grid reliability. It could approve the permit, attach conditions or deny it. A material expansion needs a permit too. A site that breaks ground before September 1, 2027, doesn’t.
The other four are described here as they’ve been reported. SB 33 is aimed at how electric infrastructure costs are split to keep other customers from paying certain costs tied to large computing facilities. SB 34 addresses counties’ authority over data center development.
SB 35 concerns water. It’s reported to require large data centers to share their water use with the Texas Water Development Board, after a state survey on the subject drew low participation this year. SB 36 goes after local incentives. As reported, it would bar data centers from seeking the tax abatements and rebates under Chapters 312, 380 and 381 and would keep local governments from renewing agreements already in place.
The repeal bills split on existing projects
The repeal bills don’t appear to treat existing projects the same way. Section 5 of HB 167 lets any data center certified before the bill’s effective date keep its exemption until the term runs out. SB 293, as its author has described it, doesn’t. Her announcement says existing exemptions would end on the effective date. It also says applications still pending with the comptroller that day would be denied, which is what HB 167 does.
New projects would come out the same either way. A campus buying $1 billion in servers and electrical equipment would owe $62.5 million in state sales tax that it doesn’t owe today. The 138 certified facilities are a different story. An operator that planned on 15 or 20 years of exempt purchases would pay the tax on everything it buys after the effective date under SB 293 as announced and on none of it under HB 167.
The industry has made its case for keeping the exemption. The Data Center Coalition, a trade group for large technology companies, told the Finance Committee in July that the exemption lowers input costs and keeps operators reinvesting, and that full repeal would put Texas’s standing as the top market for new construction at risk. A study the group commissioned found that data centers generated $3.2 billion in other state and local taxes in 2024. Thirty-seven states offer some form of data center exemption. In February, the governor of Illinois announced a two-year suspension of that state’s sales tax break.
The session starts January 12
Lawmakers convene January 12 and can file bills through March 12. In 2025 they filed more than 8,700 and passed about 1,200. For the first time in a generation, different parties will control the House and the Senate, so a bill needs votes from both to reach the governor.
Repeal has authors in both parties and 23 senators on a single bill, so the fight will be over details. Do existing certifications survive? Does the ban on local incentives pass with it? When does it take effect? HB 167 answers the last one for itself: immediately with a two-thirds vote of each chamber, and September 1, 2027, without one.
Companies with certified projects have work to do now. The audit findings drew as much attention in July as the dollar figure, so operators should confirm where they stand on their job and investment commitments. Tax pass-through and change-in-law clauses in leases, colocation agreements and power contracts will decide whether the landlord or the tenant absorbs the 6.25%. Developers with applications pending at the comptroller have the least time. Under HB 167, and under SB 293 as announced, a project that isn’t certified by the effective date gets nothing.
ERCOT’s audit of its interconnection queue is due in December. It’ll be in the hearing record when these bills get their first committee dates.
