Former Gov. George Pataki pushed the idea during the dot.com bubble, hoping to lure to New York the fast-growing new companies that provided “internet website services.”
At the time, the Pataki administration estimated the exemption would cost the state $9 million a year in foregone tax revenue. That hasn’t changed much. This year, the state tax department estimated the cost at $12 million.
But that old tax exemption is being seized upon by a new generation of data centers that could catapult the cost.
Today’s data centers dwarf those of two decades ago in size, electricity usage and — most relevant to sales tax — the cost of construction. Outfitting the massive buildings with acres of computer servers and related equipment can add billions of dollars in potentially untaxed purchases to each development.
Syracuse.com dug into the little-known tax break that could cost state and local governments hundreds of millions of dollars. In New York, more than 30 projects already have been proposed, many of them the supersized, energy-guzzling data centers that aim to serve megaliths like Google and Meta.
The breaks for those companies under the 2000 law appear to eliminate the sales taxes that could’ve gone to the state and local governments that provide the daily services funded by tax-paying New York families and businesses.
Already a move has started in the state legislature to kill the law as an outdated policy formed back when video-streaming was uncommon and most people searched the internet on AltaVista. But sponsors of that repeal don’t expect a vote this session.
At a time when state officials are wrestling with how to make sure data centers pay the full cost of connecting to the electric grid, to add costs for other customers, relatively little attention has been paid to whether they should be liable for sales taxes.
Niagara County is an exception.
That’s where a major data center has explicitly told county officials it is exempt from sales tax. Built for cryptocurrency mining and artificial intelligence, the fast-growing Lake Mariner Data Center in Niagara County is in the midst of a multibillion-dollar expansion.
TeraWulf Inc., the owner of Lake Mariner, informed county officials in February that it does not plan to pay sales tax on the equipment and supplies purchased for its massive expansion. The data center opened in 2022 as a bitcoin miner and has recently shifted its focus to AI computing.
Niagara County officials aren’t so sure today’s data centers should get the sales tax break. They hired lawyers last week to investigate.
Richard Updegrove, the Niagara County manager, said he doesn’t know how much TeraWulf is spending to build out its campus. But he knows it’s a lot.
The company recently sold $3.2 billion in bonds to pay for “a portion” of the expansion, according to filings with the Securities and Exchange Commission.
For a small county, the 4% local sales tax on a project of that magnitude would be huge, Updegrove said. The county currently receives about $100 million a year in sales tax.
“The magnitude of the impact that would have on Niagara County is hard to quantify,’’ Updegrove said. “It would be massive.’’
The amount of money at stake is highlighted by another data center project seeking approval just 25 miles from Lake Mariner.
Officials at the Genesee County industrial development agency have tentatively offered developer Stream Data Centers an exemption from sales tax that does not rely on the state law. The value of that proposed exemption, including the state’s 4% share, is estimated at $1.4 billion.
New York is far from alone in offering a sales tax break. Some 38 states provide incentives for data centers, many of which include exemptions from sales tax, according to the National Conference of State Legislatures. In many cases, claiming the tax break requires a minimum investment or job quota.
In Virginia, the leading state for data centers, sales tax exemptions for data centers cost $928 million in fiscal year 2023, according to an audit by a legislative commission.
With so much at stake, there is a surprising lack of clarity in New York about whether today’s data centers should qualify for a benefit adopted more than a quarter-century ago.
Updegrove said he asked the state tax department several times for a yes or no on whether TeraWulf qualified for the exemption. He never received an answer, he said.
In response to questions from syracuse.com | The Post-Standard, Darren Dopp, a spokesman for the tax department, said state officials cannot discuss the tax status of any specific company.
“The requirements for the data center sales tax exemption are spelled out in fairly careful detail by the department,’’ Dopp said. “It requires any company seeking that benefit to establish that they meet the criteria before they can receive it. I can’t speak to any specific company, due to tax secrecy laws.”
According to a 2014 advisory issued by the tax department, the exemption is intended for a data center that provides “uninterrupted internet access to its customers’ web pages in a secure environment and continuous internet traffic management.” The exemption covers purchasing, installing, servicing and repairing qualified equipment.
In a February letter, a lawyer for TeraWulf told Niagara County officials that the company qualified to avoid paying sales tax.
“Machinery, equipment and related tangible personal property that is required for and directly related to providing internet website services from an in-state data center is exempt from New York sales and use tax,’’ the letter said. “This exemption applies regardless of the scale of the facility.”
The company’s interpretation “has been carefully reviewed and supported independently,’’ the letter said.
Officials at TeraWulf did not respond to requests for comment from syracuse.com.
Niagara County lawmakers want their own legal review. The county legislature voted unanimously Thursday to hire a prominent Western New York law firm, Hodgson Russ, to investigate.
The resolution passed Thursday authorizes the law firm to file a lawsuit if it appears that sales tax has been improperly withheld from the county.
Amid the uncertainty, some state lawmakers have tried to repeal the sales tax exemption for data centers. Sen. Liz Krueger, D-Manhattan, and Assemblymember Chris Burdick, D-Westchester County, have sponsored matching bills to repeal the 2000 law. But their bills are not expected to proceed to a vote this session, said Jacqueline Mishler, speaking for Burdick.
“This bill was created under the assumption that the existing data center tax exemption applies to today’s hyperscale data centers and crypto miners,’’ she said in an email.
Lake Mariner Data Center was established at the site of a shuttered coal-fired power plant on the shore of Lake Ontario. It started up in 2022 as a bitcoin mine, with 60 megawatts of electric capacity as of March 2023. The facility is currently being expanded sixfold, to 360 MW, and aims to reach a maximum of 750 MW eventually.
TeraWulf has recently shifted its focus to high-performance computing, or HPC, which is the backbone of artificial intelligence. In August 2025, the company announced a deal worth up to $9.5 billion over 25 years to host cloud provider Fluidstack, a major A.I. company. Google helped finance the deal in return for a 14% stake in TeraWulf.
According to documents filed in connection with a $3.2 billion bond sale in October, TeraWulf said proceeds from the offering would be used “to finance a portion of its data center expansion at its Lake Mariner campus.”
TeraWulf’s stock price has risen more than sevenfold in the past year.
Unlike similar facilities elsewhere in New York, Lake Mariner has faced little opposition from local residents or officials, said Kevin Schuler, a county spokesman.
“There’s not a lot of opposition to the idea of reusing a coal plant for a data center,’’ Schuler said. But that doesn’t mean county officials are willing to ignore potential tax revenue from the project, he said.
A raft of proposed data centers has attracted widespread attention in New York this year as state and local officials grapple with the potential impacts on the electric grid, utility prices and environmental quality.
Operators of the electric grid have received more than 30 requests to connect large data centers in a little more than a year. TeraWulf is among them. The company proposes to build a second data center in the town of Lansing, at the site of a shuttered power plant alongside Cayuga Lake.
Given all the public concern over data centers, Updegrove said he’s surprised that state officials have not revisited the 26-year-old sales tax exemption that was clearly aimed at another era.
“It’s a pretty important issue in Niagara County, but I think this has ramifications well beyond the county of Niagara,” he said.
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