Texas data center tax break faces scrutiny as audits find compliance problems

Texas lawmakers are questioning a fast-growing data-center sales-tax exemption after Comptroller officials reported that only 20 of 138 qualifying facilities had received the required five-year audit and six audited facilities failed at least one compliance check.

The issue came before the Senate Finance Committee at an interim hearing in Austin on July 27, 2026, as lawmakers examined the investment and fiscal effects of the incentive. The committee’s published charge says the projected state cost has grown from $14.6 million for the 2014-15 biennium to $3.3 billion for the 2028-29 biennium.

What the audits found

Testimony and reporting from the hearing showed that six of the 20 audited facilities were found out of compliance with at least one program requirement. The reported categories included job creation, required square footage and a required power agreement.

The findings do not establish that the facilities committed fraud or other crimes. They show that some audited projects did not meet one or more certification requirements. Because only 20 of the 138 qualifying facilities had been audited as of the hearing, the results cover a limited portion of the program.

The Texas Comptroller certifies facilities and verifies their commitments. Under the current program, the agency audits each qualifying data center at its five-year anniversary to confirm capital investment and job creation. It also reviews job information annually until each qualifying job has been verified as retained for at least five years.

How the exemption works

For a standard qualifying data center, the facility generally must have at least 100,000 square feet, commit to at least $200 million in capital investment over five years and create at least 20 qualifying jobs in the county where it is located.

A separate qualifying large data center project category requires at least 250,000 square feet, $500 million in capital investment and 40 qualifying jobs. Those thresholds should not be conflated with the standard data-center requirements.

The exemption applies to the state’s 6.25% sales and use tax. Local sales taxes remain due. Eligible purchases can include electricity, cooling systems, emergency generators, servers, storage devices, network equipment, electrical systems and related equipment that is necessary and essential to operating the facility.

The exemption lasts either 10 or 15 years, depending on the amount of capital investment made during the first five years after certification. A facility reaching at least $200 million but less than $250 million generally receives a 10-year period; an investment of at least $250 million qualifies for 15 years under the Comptroller’s guidance.

Repayment risk for facilities that lose certification

If a qualifying owner, operator or occupant fails to meet certification requirements, the Comptroller can terminate the facility’s certification and revoke related registration numbers.

Revoked registrants may then owe state sales or use tax on tax-free purchases made under the exemption, along with penalties and interest calculated from the purchase date. The repayment exposure gives the investment and job commitments financial consequences if they are not met.

Why the fiscal estimate has grown

The Senate hearing notice says the projected state cost rose from $14.6 million in the 2014-15 biennium to $3.3 billion in 2028-29 as the exemption expanded and the number of qualifying facilities increased.

That figure is a projection for a future two-year budget period, not money already spent and not a final calculation of the state’s loss. For taxpayers, the question is whether the economic activity generated by the facilities justifies the revenue the state forgoes and whether the state is checking compliance quickly enough to protect the public interest.

Data-center development can also affect local communities through electricity demand, infrastructure needs, land use and employment. The state exemption itself does not eliminate local sales taxes, but the broader growth of the industry can create costs and benefits that extend beyond the facilities receiving the break.

What happens next

The July 27 hearing was part of an interim review under the Senate Finance Committee’s assigned charge. The hearing did not repeal, suspend or formally change the exemption. As of August 2, 2026, no repeal or new limitation had been enacted.

The committee’s review could help shape legislation for the 2027 session. Possible changes may involve tighter safeguards, faster audits, additional reporting, limits on eligibility or repeal, but lawmakers had not adopted those changes at the time of publication.

Residents can follow the Comptroller’s certification and audit information and watch for 2027 proposals affecting state revenue, data-center jobs, electricity demand and business development. The central unresolved issue is whether the state can verify promised benefits before the projected cost grows further.

Sources

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