Data Centers in the Cross Hairs of both the Texas Legislature and Texas Comptroller Audits

There is an old saying in tax law that if you are not at the table, you may be on the menu.  Well, data centers in Texas will want to be at the table this coming Texas Legislative session as they will almost certainly be on the menu, at least as far as some Texas Legislators are concerned. They may also want to be proactive as they become the targets of both the Texas Legislature and Texas Comptroller audits.

Texas offers various sales tax exemptions for qualifying data centers, but eligibility for the exemptions requires certification by the Texas Comptroller.  These are set out in Sections 151.359 (Data Centers) and 151.3595 (Large Data Centers) of the Texas Tax Code.  Given the scale and number of these projects, the tax savings associated with these exemptions are substantial so much so that recent political winds in Texas have begun to target these exemptions in part because of their cost to the State. For the 2014 to 2015 biennium, shortly after these exemptions were put in place, their cost was estimated at $14.6 million.[1] The Texas Comptroller estimates these exemptions will now cost the State over $3 billion in sales tax revenues over the next two years.[2]  

Recently, the Texas Governor called for the Texas Legislature to repeal data center sales tax exemptions and “other outdated or unnecessary incentives for data centers.”[3] 

This week, the Senate Finance Committee heard invited and public testimony on issues relating to data centers as part of their interim charge with several members of the Committee suggesting they would support legislation to reform the Texas sales tax exemptions for data centers.[4]  Equally notable was testimony from the Texas Comptroller’s office at the Senate Finance Committee hearing suggesting that the Texas Comptroller is currently targeting data centers for audit.  The Texas Comptroller’s office noted that out of the 138 qualified data centers with sales tax exemptions, only 20 have been audited.[5]   Six of those 20 were found to be in breach of their exemption agreements, according to Texas Comptroller personnel, noting the Texas Comptroller’s intention to recover the sales tax benefits claimed by the data centers in those cases.[6]  

What does all this mean for data centers in Texas?  Well, history may provide some clue.  In 2001, the Texas Legislature enacted the Texas Economic Development Act which allowed school districts to offer property-tax incentives.  This was generally referred to as “Chapter 313” agreements because of its location in the Texas Tax Code.   Chapter 313 had an expiration date of December 31, 2022, and the Legislature chose not to extend it.  As the deadline approached, the Texas Comptroller’s office received a surge of applications, and due to the lack of resources, announced it would be unable to process them before the deadline.  As a result, several applications filed on time were essentially denied.  Multiple applicants filed suit seeking mandamus and temporary relief against the Texas Comptroller seeking to compel the Texas Comptroller to process the applications that had otherwise been properly filed.[7]  The Texas Supreme Court denied relief holding that it did not have the statutory authority to compel the Texas Comptroller to do so because “any judicial remedy risk[ed] undermining the legislature’s authority to declare the end of Chapter 313.”[8] 

While there may be significant uncertainty as to whether the Texas data center exemptions will be reformed and what those reforms will ultimately look like, there is always a possibility that some type of grandfather provision will be included for existing qualifying data centers. If so, any repeal or cutback to the exemptions could result in a surge of applications submitted prior to any expiration date, which could overwhelm Texas Comptroller resources creating a situation similar to the expiration of Chapter 313.

The moral of the story for data centers may therefore be to file early and file often if seeking certification from the Texas Comptroller for sales tax exemption under either Tex. Tax Code §§151.359 or 151.3595 in the event the exemptions end or become limited soon.  In addition, considering existing political winds, data centers should expect to face aggressive Texas Comptroller audits seeking ways to claim breach of exemption agreements resulting in significant assessments of tax.  As in any case, however, Texas Comptroller assessments can be and often are successfully challenged on various grounds.  Data centers should also keep in mind that, even if the exemption for data centers is disallowed in any given case or later reformed/repealed by the Texas Legislature, there may be other exemptions and exclusions from Texas sales tax that may apply to specific transactions.  Our team of Texas tax professionals stands ready to provide guidance and assistance with these and any other Texas tax matters.

[1]  See Tex. S. Comm. On Finance, Interim Charges to the 89th Legislature (2026), https://senate.texas.gov/cmte.php?c=540&utm

[2] See id.

[3] Letter from Greg Abbott, Governor of Tex., to Thomas Gleeson, Chairman, Pub. Util. Comm’n of Tex., & Pablo Vegas, CEO, ERCOT (June 10, 2026), https://gov.texas.gov/uploads/files/press/Thomas_Gleeson_Pablo_Vegas_Data_Centers_Directive_Letter_to_PUC_ERCOT_FINAL.pdf

[4] Notice of Formal Hearing and Agenda for the S. Comm. on Finance on Interim Charge Relating to Data Center Investment and State Fiscal Effects Before the S. Comm. on Finance, 89th Leg., Interim (Tex. July 27, 2026).

[5] See Texas Tribune, Texas’ Multibillion-Dollar Sales Tax Exemption for Data Centers is Growing While Audits Lag (July 27, 2026).

[6] See id

[7] See In re Stetson Renewables Holdings, LLC, 658 S.W.3d 292, 293n.1 (Tex. 2022). 

[8] See id. at 297.