Sales and Use Tax Law: exemptions: certified data center facilities.

Senator Padilla's data center tax initiative would establish partial sales tax exemptions for certified facilities that meet stringent environmental and economic development requirements in California. Starting January 2026, qualifying data centers could reduce state sales taxes to 2% on equipment purchases by creating at least 20 high-wage jobs, investing $200 million or more, and adhering to strict carbon-free energy and water conservation standards.

To maintain certification, facilities must source at least 70% of their energy from carbon-free providers, generate 50% of power through on-site systems, and implement water recycling and conservation measures. The bill prohibits diesel backup generators and requires battery storage systems. These requirements align data center growth with California's renewable energy goals while creating skilled employment opportunities.

The tax benefit applies only to state-level charges, preserving local sales taxes and dedicated funding streams. Facilities face certification revocation if they fail to maintain compliance after notice and opportunity to cure deficiencies. The California Department of Tax and Fee Administration must analyze and report annually on program participation and exemption amounts starting in 2027 to evaluate effectiveness.

The measure includes detailed definitions of qualifying equipment, from servers and cooling systems to construction materials, while excluding office supplies and short-term rentals. This framework aims to provide clarity for implementation while ensuring benefits support core data center operations rather than ancillary business activities.