North Carolina repealed its sales tax exemption on data center electricity while preserving capital equipment incentives, rebalancing policy toward revenue generation.

North Carolina has narrowed one of its most valuable data center tax incentives, repealing the state's sales and use tax exemption on electricity purchases while preserving exemptions for qualifying equipment and other capital investments.

The change, enacted when Gov. Josh Stein signed the state's 2026 budget this week, reflects a policy shift as lawmakers grapple with the rapid growth of AI infrastructure and its impact on electricity demand. Stein highlighted the repeal as one of the measure's accomplishments, saying it "eliminates tax exemptions for data centers' electricity use."

The budget repeals the sales and use tax exemption for electricity purchased by qualifying data centers while leaving in place exemptions covering qualifying equipment and other eligible investments under existing statutes. According to the North Carolina General Assembly's Fiscal Research Division, eliminating the electricity exemption will increase General Fund revenue by $21.4 million in fiscal year 2026-27, rising to $28.6 million annually by fiscal year 2030-31.

For data center operators, the budget redraws the economics of AI-scale infrastructure. North Carolina continues to incentivize capital investment while ending a subsidy tied to ongoing electricity consumption, putting greater emphasis on power availability, deliverability, and long-term operating costs when evaluating new campuses.

"Repealing the electricity sales tax exemption changes the economics at the margin, especially for very large AI campuses where power is not a minor operating expense," said Neil Osnato, founder of Persistence Analytics Group. "But I would not view it as the primary siting variable."

Osnato noted that developers continue to prioritize whether utilities can deliver power on schedule, whether transmission infrastructure can support growing loads, and whether long-term operating costs remain predictable. "For AI-scale data centers, the first-order questions remain: Can I get power? Can it be delivered on the timeline I need? Can the transmission system support the load? Can the interconnection process move fast enough? Can the operating cost remain durable over the life of the investment?" he said.

Osnato argued the tax change reflects a broader shift in how states approach AI infrastructure incentives. "The tax change matters because it signals that states may be becoming less willing to subsidize open-ended electricity consumption while still supporting capital investment, equipment, construction, and local economic development," he said. The policy separates two incentives that have often been treated as one: encouraging the construction of data centers while subsidizing the electricity they consume over decades of operation. "For operators, the implication is simple: power availability, deliverability, and cost durability are becoming more important than headline incentive packages," he concluded.

The budget preserves enough of North Carolina's incentive framework to provide certainty for future investment, according to Dan Diorio, vice president of state policy at the Data Center Coalition. "While the electricity sales tax exemption was an important part of the overall data center sales tax exemption program, we are happy that this budget provides certainty for data centers to continue investing in North Carolina," Diorio said. He noted that the industry remains committed to working with state and local leaders to support continued development and keep North Carolina competitive.

The budget action comes as North Carolina lawmakers continue to debate broader policies governing AI-era electricity demand. If enacted, Senate Bill 730, the proposed Ratepayer Protection Act, would require special utility service agreements for qualifying large-load customers and establish additional requirements for future data center development.

Taken together, the budget and pending legislation suggest North Carolina is refining rather than retreating from its approach to AI infrastructure: encouraging capital investment while applying greater scrutiny to the long-term public costs associated with rapidly growing electricity demand. North Carolina's distinction between incentivizing construction and subsidizing long-term electricity consumption could become a model for other states competing for AI infrastructure while managing rising power demand.