They use evaporative cooling on days where it is over 85f

Microsoft’s data centers currently use adiabatic cooling, which relies on outside air to cool down temperatures inside. It’s a system that uses less electricity than air conditioning and less water than cooling towers. But when temperatures rise above 85 degrees Fahrenheit, outside air isn’t very helpful. At that point, an evaporative cooling system kicks in, which uses water. It works like a “swamp cooler” — cooling the air by pushing it over or through water-soaked screens.

https://local.microsoft.com/wp-content/uploads/2021/11/Datacenter-water-consumption-fact-sheet.pdf

They probably treat the water to prevent mineral and bacterial build up. No matter how sanitary it is it will probably require some amount of treatment before it can be put back into public drinking supplies.

No, but I assume you'd have to build extra infrastructure for that, which is expensive. They might now consider it worth it if they continue to need that much water, though.