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SD — State Policy Updated January 2026

South Dakota

Statewide incentives and constraints, plus current policy conditions that shape data center development.

Reinvestment Payment Program Large load regulatory scrutiny Local zoning conditional use permits Water use limitations Utility Regulation Water Constraints

Overview

South Dakota has no data center-specific sales or use tax exemption in statute as of January 2026. A 2025 proposal (SB 177) to create a refund program for data center equipment failed in the state Senate. Instead, large data center projects rely on the state’s general Reinvestment Payment Program, which refunds sales and use tax on qualifying projects over $20 million. Meanwhile, local governments are actively tightening zoning rules with strict setback, noise, and water-use requirements, and state regulators have begun scrutinizing the grid impacts of large electric loads.

Incentives

Reinvestment Payment Program

The Governor’s Office of Economic Development allows reinvestment payments that offset upfront project costs by refunding the state sales and use tax paid on those costs.[1]

  • Projects must exceed $20 million in new or expanded facilities (or $2 million for equipment upgrades).[1]
  • Applicants must demonstrate that the investment would not likely occur without the payment.[1]
  • Certain project types (retail, residential, health care, pipeline transport) are ineligible.[1]

Requirements and Conditions

Failed 2025 Legislation (SB 177)

SB 177 proposed a state sales and use tax refund (excluding municipal tax) for enterprise IT equipment and computer software used in qualified data centers, but the bill did not pass.[2][3]

  • Qualified data centers would have required UPS/generator backup and fire suppression systems.[3]
  • Projects would have needed certification by the Governor’s Office of Economic Development before claiming refunds.[3]
  • The bill capped initial furnishment and refurbishment costs at $500 million over a 20-year window, with a qualifying deadline of July 1, 2029.[3]

Industry advocates argue that without a statutory sales tax exemption, South Dakota is less competitive than neighboring states for data center development.[2]

Utility and Grid Rules

The South Dakota Public Utilities Commission hosted a large electric load education session in November 2024 with utilities, regional transmission organizations, and data center representatives to discuss large-load requests and planning.[4] This signals regulatory scrutiny around grid impacts and ratepayer cost allocation for large data center loads.

Water and Environmental Rules

In January 2026, the Sioux Falls City Council stated that a proposed 500 MW data center may use municipal water only for domestic use, not for cooling.[6] This indicates that cooling water must come from on-site wells or other non-municipal sources, a significant constraint in areas with limited groundwater.

Local Zoning

McPherson County Ordinance 2025-1

Data processing centers are allowed as conditional uses in agricultural districts and must comply with detailed siting rules.[5]

  • Six-foot sight-obscuring fencing is required around the perimeter.[5]
  • Noise mitigation plans must be submitted and approved.[5]
  • Buffer yards of 50 feet (side and rear) and 150 feet (front) are required.[5]
  • Facilities must maintain 50-foot setbacks from property boundaries and a one-mile setback from any church, school, or occupied residence.[5]
  • Permits require utility approval and evidence that the facility will not degrade local capacity or voltage quality.[5]
  • Decommissioning and reclamation requirements include financial assurance and notice timelines.[5]

Sioux Falls Rezoning

In January 2026, the Sioux Falls City Council approved rezoning agricultural land to light industrial for a proposed 500 MW data center.[6]

  • The project must maintain a 200-foot setback from property lines under city zoning rules.[6]
  • Local land-use approval is a gating step for large projects, even when state-level incentives are in play.[6]

What to Watch

  • Whether any 2026-session bills revive or modify the data center sales tax refund proposal from SB 177.
  • Additional county-level moratoria or ordinances (Brown County, Lincoln County, Minnehaha County) that may impose new setbacks or permitting criteria.
  • Further Public Utilities Commission proceedings on large-load interconnection and cost allocation as more data centers seek grid access.

Sources

[1] South Dakota Governor’s Office of Economic Development, “Reinvestment Payment Program,” updated November 10, 2025, https://sdgoed.com/public-records/reinvestment-payment-program/ (accessed January 8, 2026).

[2] Joshua Haiar, “Data center official says other states offer better incentives than SD,” South Dakota Searchlight, June 16, 2025, https://southdakotasearchlight.com/2025/06/16/data-center-official-says-other-states-offer-better-incentives-than-sd/ (accessed January 8, 2026).

[3] South Dakota Legislature, “2025 Senate Bill 177: An Act to provide a sales and use tax refund for goods and services related to data center operations (Senate Taxation Engrossed),” 2025, https://legiscan.com/SD/text/SB177/id/3109104/South_Dakota-2025-SB177-Comm_Sub.pdf (accessed January 8, 2026).

[4] South Dakota Public Utilities Commission, “PUC to host large electric load education session,” press release, November 14, 2024, https://puc.sd.gov/News/2024/11142024.aspx (accessed January 8, 2026).

[5] McPherson County, South Dakota, “Ordinance 2025-1: An Ordinance Amending McPherson County Ordinance 24-1, Establishing Zoning Regulations for Data Processing Centers,” adopted February 10, 2025, https://mcpherson.sdcounties.org/files/2025/02/Ordinance-25-1-Data-Processing-Center-2-10-25.pdf (accessed January 8, 2026).

[6] SDPB, “Sioux Falls City Council approves rezoning of proposed data center land,” January 7, 2026, https://www.sdpb.org/politics/2026-01-07/sioux-falls-city-council-approves-rezoning-of-proposed-data-center-land (accessed January 8, 2026).