The unique electronic band structure of indium nitride InN, part of the industrially significant III-N class of semiconductors, offers charge transport properties with great application potential due to its robust n-type conductivity. Here, we explore the water sensing mechanism of InN thin films. Using angle-resolved photoemission spectroscopy, core level spectroscopy, and theory, we derive the charge carrier density and electrical potential of a two-dimensional electron gas, 2DEG, at the InN surface and monitor its electronic properties upon in situ modulation of adsorbed water. An electric dipole layer formed by water molecules raises the surface potential and accumulates charge in the 2DEG, enhancing surface conductivity. Our intuitive model provides a novel route toward understanding the water sensing mechanism in InN and, more generally, for understanding sensing material systems beyond InN.