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AZ — State Policy Updated January 2026

Arizona

Statewide incentives and constraints, plus key municipal restrictions and active policy debates.

Computer Data Center (CDC) Program TPT Equipment Exemption Electricity resale prohibition Colocation minimum load requirement E-Verify enrollment Water Constraints

Overview

Arizona has operated a major data center tax incentive program since 2013, offering up to 20 years of state, county, and local transaction privilege tax exemptions for facilities that meet investment thresholds ranging from $25 million to $200 million. However, municipal governments — especially Tucson — are now drafting new regulatory frameworks for large-scale data centers that emphasize water conservation, noise mitigation, and zoning oversight. Pending legislation could also shorten the incentive program’s application window from 2033 to 2026.

Incentives

Computer Data Center (CDC) Program

The CDC program provides transaction privilege tax (TPT) and use tax exemptions at state, county, and local levels for qualified data center equipment purchases by certified owners, operators, and colocation tenants.[1]

  • Duration: Up to 10 years after certification, or 20 years if the facility qualifies as a sustainable redevelopment project.[1]
  • Investment threshold: $50 million within five years for data centers in Maricopa or Pima County, or $25 million within five years for facilities in other Arizona counties.[1]
  • Greenfield sustainable projects: $200 million within five years for facilities that meet higher sustainability standards.[1]
  • Certification deadline: The Arizona Commerce Authority may certify new data centers through December 31, 2033 under current law.[2]

TPT Exemption for CDC Equipment

The retail transaction privilege tax statute exempts computer data center equipment sold to certified owners, operators, or qualified colocation tenants during the qualification period for use in a certified facility.[3]

Requirements and Conditions

Data centers must meet several operational and compliance requirements to qualify for the CDC program and to operate within Arizona’s legal framework.

Facility and Tenant Requirements

  • Primary use: A facility must be predominantly used to house working servers to qualify as a computer data center.[2]
  • Colocation minimum load: A qualified colocation tenant must have at least 500 kW per month for two or more years.[1]

Operational Restrictions

  • No electricity resale: A data center may not generate electricity for resale or sell electricity outside the facility.[2]
  • E-Verify enrollment: Owners and operators must provide proof of E-Verify enrollment in the CDC application process.[1]

Water and Environmental Rules

Tucson Large Quantity Water User Ordinance

Tucson adopted a Large Quantity Water User ordinance on August 19, 2025, specifically in response to large-scale data center proposals.[6] The city directed staff to conduct community engagement and consider amendments within six months. While the full text was not publicly available at the time of research, the ordinance is expected to impose water use thresholds, conservation plan requirements, and monitoring obligations on new facilities.

Municipal Water Restrictions

Several Arizona cities have already implemented water-related restrictions for data centers:

  • Marana: Requires proof of adequate water supply and prohibits potable water for cooling.[6]
  • Phoenix: Requires water source documentation as part of the special permit process.[6]

Local Zoning

Tucson’s New Regulatory Framework

On August 6, 2025, Tucson Mayor and Council ended negotiations for Project Blue and initiated a citywide regulatory framework for large-scale data centers.[4] The city is drafting a Unified Development Code (UDC) amendment that will define large-scale data centers, establish design and development standards, and require review through the Zoning Examiner Legislative Procedure with Mayor and Council approval.[5]

Until the amendment is adopted, large-scale data centers are treated as a Generating System land use and are not permitted by right in any zone. They require a Planned Area Development (PAD) process, which involves public hearings and detailed site plan review.[6]

Other Arizona Cities

Tucson is benchmarking its new regulations against frameworks already in place in other Arizona cities:[6]

  • Chandler: Data centers are a principal use only in a PAD overlay district; noise monitoring and mitigation are required.
  • Mesa: Uses PAD overlay and detailed site and building standards.
  • Phoenix: Requires special permits and noise studies near residential areas.

What to Watch

  • HB 2119 (2026 legislative session): This bill, prefiled on January 2, 2026, would move the CDC program’s application deadline from December 31, 2033 to December 31, 2026, effectively shortening the incentive window by seven years.[7]
  • Tucson UDC amendment: The city’s draft large-scale data center regulations are expected to move through the Planning Commission and Mayor and Council approval process in 2026. These regulations will set precedent for how Arizona cities manage data center development outside of incentive programs.
  • Large Quantity Water User ordinance amendments: Tucson directed staff to conduct community engagement and consider amendments to the new water ordinance within six months of its August 2025 adoption. Final thresholds and enforcement mechanisms should become clear by mid-2026.

Sources

[1] Arizona Commerce Authority, “Computer Data Center Program Rules and Guidelines,” effective September 29, 2021, https://www.azcommerce.com/media/g0lf4km1/cdc-rules_adopted_09-21-2021.pdf (accessed January 8, 2026).

[2] Arizona Legislature, “41-1519 Computer data center tax relief; definitions,” n.d., https://azleg.gov/ars/41/01519.htm (accessed January 8, 2026).

[3] Arizona Legislature, “42-5061 Retail classification; definitions,” n.d., https://azleg.gov/ars/42/05061.htm (accessed January 8, 2026).

[4] City of Tucson, “Motions Adopted Under Aug. 6, 2025, Study Session Item 8/Project Blue,” August 6, 2025, https://www.tucsonaz.gov/files/sharedassets/public/v/1/government/city-manager-office/documents/motions-adopted-under-aug-6.pdf (accessed January 8, 2026).

[5] City of Tucson Planning and Development Services Department, “C8-25-04 Large-Scale Data Center Regulations Unified Development Code Amendment (Citywide),” September 10, 2025, https://www.tucsonaz.gov/files/sharedassets/public/v/1/pdsd/documents/boards-committees-commissions/planning-commission/09.17.25/pc-memo-_data-center-code-update-9-17-25.pdf (accessed January 8, 2026).

[6] City of Tucson, “Large-Scale Data Center UDC Amendment Planning Commission Study Session,” September 17, 2025, https://www.tucsonaz.gov/files/sharedassets/public/v/1/pdsd/documents/boards-committees-commissions/planning-commission/09.17.25/data-center-study-session-1-_resentation.pdf (accessed January 8, 2026).

[7] Arizona Legislature, “HB 2119 (Fifty-seventh Legislature, Second Regular Session)” (prefiled January 2, 2026), https://www.azleg.gov/legtext/57leg/2r/bills/hb2119p.pdf (accessed January 8, 2026).