Virginia Preserves Data Center Tax Incentive, Adds New Electricity Consumption Tax

Virginia has significantly altered the tax landscape for one of its largest and fastest-growing industries by imposing a new tax on electricity consumed by data center operators. Beginning July 1, 2026, operators are subject to a tax of $0.011 per kilowatt-hour of electricity consumed, with annual collections capped at $600 million. The tax is scheduled to remain in effect through June 30, 2028.

Importantly, Virginia preserved its long-standing sales and use tax exemption for qualifying data center equipment. The compromise allows the Commonwealth to retain one of its principal economic development incentives while generating up to $1.2 billion in additional revenue over the biennium.

Virginia's Data Center Sales Tax Exemption Remains Intact

Virginia's data center exemption, codified in Va. Code § 58.1-609.3(18) and (19), is among the nation's most generous. To qualify, an operator generally must invest at least $150 million in a data center, create at least 50 new jobs paying at least 1.5 times the prevailing average wage and enter into a memorandum of understanding with the Virginia Economic Development Partnership Authority. Reduced investment and employment thresholds apply in certain distressed localities.

The exemption broadly applies to purchases of computer equipment, enabling software and related infrastructure, including chillers and backup generators, as well as qualifying upgrades, supplements and replacements. The exemption is scheduled to remain in effect through June 30, 2035, with extensions available through 2040 and 2050 for operators satisfying additional investment and employment thresholds. Unlike several other states, however, Virginia does not exempt electricity consumed by data centers from sales and use tax.

The exemption has played a significant role in Virginia's emergence as the largest data center market in the Western Hemisphere. During fiscal year (FY) 2025 alone, data center operators reported $48.6 billion in total investment in Virginia, including $33.2 billion in exempt purchases of equipment and software.

Rising Costs Prompted Lawmakers to Reconsider the Incentive

The extraordinary growth of Virginia's data center industry has also substantially increased the fiscal cost of the exemption. A December 2024 report by Virginia's Joint Legislative Audit and Review Commission (JLARC) found that data centers saved $928.6 million in sales taxes in FY 2023 alone, making the exemption by far the Commonwealth's largest economic development incentive. JLARC also estimated that each dollar of forgone revenue attributable to the exemption generated approximately $0.48 in additional state revenue.

Those costs have attracted increasing scrutiny as data center electricity demand has grown and concerns about grid capacity, infrastructure requirements and electricity rates have intensified. During the 2026 budget process, Virginia lawmakers considered eliminating the data center sales and use tax exemption entirely. Ultimately, they chose a different approach.

Virginia's New Tax Targets Data Center Electricity Consumption

The 2026 budget preserves the existing sales and use tax exemption but adopts a new electricity consumption tax for data center operators from July 1, 2026, through June 30, 2028.

For electricity supplied by an electric utility, the utility generally collects the tax from the data center operator and remits it to the State Corporation Commission. Operators using self-supplied generation must report their electricity consumption and remit the tax directly, creating a new compliance obligation for facilities whose electricity consumption falls outside traditional utility billing and tax collection mechanisms.

The new tax represents a notable shift in Virginia's data center policy. Rather than withdrawing the underlying economic development incentive, Virginia has sought to recover additional revenue from the industry by taxing one of the principal concerns associated with its continued growth: extraordinary electricity demand.

The General Assembly of Virginia also directed the Joint Subcommittee on Tax Policy to study Virginia's data center sales and use tax exemption and other data center impacts during the 2026 interim. The study includes potential mechanisms for providing additional direct revenue to the Commonwealth from the data center industry, with recommendations due by December 15, 2026.

Holland & Knight Insights

• Project Economics: The new electricity consumption tax should be incorporated into the economics of both existing and proposed Virginia facilities. Operators evaluating new projects should consider the new tax together with the value of Virginia's sales and use tax exemption, electricity costs, infrastructure requirements, and other state and local taxes.
• Compliance and Contractual Considerations: Operators should evaluate new compliance obligations, particularly where facilities use self-supplied generation or other arrangements outside traditional utility billing mechanisms. Long-term utility agreements, site leases and incentive arrangements may also warrant review to determine how the new tax is allocated and whether contractual provisions address future changes in state tax law.
• Future Tax Treatment: The tax is currently scheduled to expire on June 30, 2028, but its enactment comes as Virginia continues to study the fiscal and infrastructure effects of data center development. Operators planning long-term investments should consider the possibility of further changes to Virginia's tax treatment of the industry.

For more information or questions regarding Virginia's data center sales and use tax exemption or the new electricity consumption tax, please contact the author.

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