Back when dial-up internet was still a thing, New York created a sales tax exemption for “internet data centers” — essentially web hosting companies that kept your Geocities page online 24/7. The Pataki administration reportedly estimated it would cost the state about $9 million annually. Fast-forward to 2025, and AI giants are using that same law to dodge potentially hundreds of millions in taxes on GPU farms that would make NASA jealous.

The disconnect is almost comical, like trying to park a Tesla Cybertruck in a horse stable. New York’s Department of Taxation still defines qualifying facilities as those providing “uninterrupted Internet access to customers’ Web pages” in high-security environments. But today’s AI data centers aren’t hosting your blog — they’re running ChatGPT’s brain.

The Billion-Dollar Lake Mariner Gambit

TeraWulf’s former coal plant pivot tests the limits of 26-year-old legislation.

Enter TeraWulf’s Lake Mariner facility in Niagara County, where a defunct coal plant has become ground zero for this tax policy collision. The company raised $3.2 billion in bonds to transform the site from a 60-megawatt bitcoin mine into a 750-megawatt AI powerhouse, complete with a $9.5 billion hosting deal backed by Google.

TeraWulf’s position? According to county officials, the company believes the exemption applies “regardless of the scale of the facility.” Translation: whether you’re hosting wedding photos or training the next generation of artificial intelligence, the tax break is the same.

Niagara County officials, watching billions in potential revenue slip away from their $100-million annual sales tax intake, aren’t buying it. They’ve hired outside legal counsel and are preparing for what could become a precedent-setting fight over tens or hundreds of millions in potential local sales tax revenue.

The Legislative Reckoning

State lawmakers push back as the fiscal stakes explode beyond recognition.

Senator Liz Krueger isn’t having it. Her bill S9288 would simply delete the exemption entirely, arguing that a law written for dial-up shouldn’t subsidize the AI revolution. She’s also backing a three-year moratorium on new hyperscale data centers while the state figures out what these facilities actually cost taxpayers and ratepayers.

But don’t expect quick action. The legislative path faces significant hurdles, highlighting how entrenched these incentives have become even as their original purpose fades into internet history. Meanwhile, 38 states compete with similar breaks, though most impose investment thresholds and job requirements that New York’s ancient framework lacks.

The real question isn’t whether this loophole will close, but how much public money flows through it first.