Overview
Iowa offers state sales and use tax exemptions for large data centers that invest at least $200 million, covering equipment, electricity, and backup generation fuel. Recent policy changes now impose time limits on electricity and fuel exemptions for new projects completed after June 6, 2025, with longer terms available for rural sites. The state also provides partial tax refunds for smaller data centers that do not meet the full exemption thresholds.
Incentives
Data Center Sales/Use Tax Exemption
This exemption eliminates state sales and use tax on qualifying data center equipment, backup power fuel, and electricity purchased for data center operations.[1][2]
- $200 million minimum investment required within six years
- Physical location must be at least 5,000 square feet
- Must comply with sustainable design standards adopted under Iowa’s state building code
- Registration with the Department of Revenue and annual reporting required
- Facilities that fail to meet 80% of the minimum investment within six years lose the exemption and must repay all taxes with penalties and interest
For new construction or additions completed on or after June 6, 2025, electricity and backup fuel exemptions are time-limited:[1]
- 10 years in cities with populations over 30,000
- 15 years outside those cities
Partial Sales/Use Tax Refunds for Smaller Data Centers
Iowa offers two tiers of partial refunds for data centers that do not qualify for the full exemption.[2]
Small and mid-sized data centers can claim a 50% refund of sales/use tax on electricity and fuel:
- $1 million to $10 million investment for new construction, or up to $5 million for rehabilitation
- Investment must occur within three years
- Refunds available for up to five years
A separate partial refund covers equipment, backup fuel, and electricity for larger projects:
- At least $10 million investment for new construction or $5 million for rehabilitation
- Refund periods of seven or ten years depending on total investment level
- Minimum site size and lease term requirements for leased facilities apply
- Sustainable design standards compliance required
Requirements and Conditions
Sustainable Design Standards
All data centers receiving tax benefits must meet sustainable design and construction standards adopted by the state building code commissioner under Iowa Code 103A.8B.[3] This requirement ensures facilities incorporate energy efficiency and environmental performance measures as defined in the state building code.
Registration and Reporting
Data centers must register with the Iowa Department of Revenue before claiming exemptions or refunds. Annual reporting is required to maintain eligibility and verify ongoing compliance with investment thresholds and operational requirements.
Clawback Provisions
If a data center fails to meet 80% of the minimum investment threshold within the six-year window, it forfeits the exemption entirely and must repay all previously exempted taxes plus penalties and interest.[1]
Water and Environmental Rules
Water Use Permitting
Iowa requires a permit for any water withdrawal of at least 25,000 gallons in a 24-hour period in any calendar year.[4] Data centers using water for cooling must obtain permits from the Iowa Department of Natural Resources (DNR) and submit annual water use reports.
Drought Allocation Restrictions
The DNR can impose priority allocation restrictions during drought “triggering events.”[4] This creates operational risk for water-intensive cooling systems, particularly during extended dry periods when agricultural and municipal water needs may take precedence over industrial users.
What to Watch
- The June 6, 2025 policy change signals a shift toward tighter controls in urban areas while maintaining longer incentive terms for rural projects. Watch for how this geographic distinction affects future project siting decisions.
- DNR drought allocation authority may become more significant as climate patterns shift. Monitor whether the state develops more specific allocation frameworks for data center water use during drought conditions.
- Future legislative sessions may revisit the time limits on electricity exemptions, particularly if rural communities compete more aggressively for data center projects.
Sources
[1] Iowa Legislative Services Agency, “Iowa Code 2026, Section 423.3 (Streamlined Sales and Use Tax Act),” 2026, https://www.legis.iowa.gov/docs/code/423.3.pdf (accessed 2026-01-08).
[2] Iowa Legislative Services Agency, “Iowa Code 2026, Section 423.4 (Streamlined Sales and Use Tax Act),” 2026, https://www.legis.iowa.gov/docs/code/423.4.pdf (accessed 2026-01-08).
[3] Iowa Legislative Services Agency, “Iowa Code 2026, Section 103A.8B (Sustainable Design or Green Building Standards),” 2026, https://www.legis.iowa.gov/docs/code/103A.pdf (accessed 2026-01-08).
[4] Iowa Department of Natural Resources, “Water Allocation & Use,” n.d., https://www.iowadnr.gov/Environmental-Protection/Water-Quality/Water-Supply-Engineering/Water-Allocation-Use (accessed 2026-01-08).