Governor Abigail Spanberger signed Virginia's 2026-2028 biennial budget into law on June 30, preserving the data center equipment sales and use tax exemption while creating the first statewide electricity consumption tax on data centers in the United States. Beginning July 1, the tax applies at $0.011 per kilowatt-hour to electricity consumed at qualifying facilities, billed monthly regardless of whether the power comes from a utility, a competitive supplier, or on-site generation.
The provision resolves months of debate over whether Virginia should keep funding one of its largest business tax incentives, a cost-allocation fight that is currently playing out in other states. According to a Virginia Department of Taxation, the exemption's value to operators reached $1.9 billion in fiscal 2025, about 2% of the Commonwealth's budget. Virginia settled on a narrower fix than full repeal: keep the incentive that draws projects to the state, and tax the electricity those projects use once running.
Tax Applies to Self-Generated Power and Follows the Utility Account
The enacted budget defines a data center broadly, covering facilities built around at least one megawatt of electrical capacity used primarily for data storage, management, and processing, while excluding facilities whose main function is internet access or communications service. Liability follows whoever holds the utility account, or whoever operates the on-site generation. The Commission must issue implementation guidance within 60 days, and the first payment, covering July through September, comes due in September. That leaves finance teams little time before the cost lands atop Dominion's incoming 14-year large-load tariff terms.
A $600 Million Cap Triggers Refunds Starting in Fiscal 2027
Statewide collections are capped at $600 million a year, with any amount above that, after administrative costs, refunded to operators on a pro-rata basis starting in fiscal 2027. Utility-billed operators get the refund credited to their account, while those on self-generated power are refunded directly by the Commission, with no interest either way. The tax itself sunsets automatically on July 1, 2028, under House Bill 30, unless lawmakers vote to extend it.
Industry and Environmental Groups Both Criticized the Compromise
The compromise drew criticism from multiple directions. The Data Center Coalition, the industry's main trade group, warned the tax could push investment to other states, a claim some energy researchers have questioned given how small the levy is next to overall electricity costs. Environmental groups, including the Sierra Club's Virginia chapter and the Chesapeake Bay Foundation, said the deal falls short because a companion measure on clean power sourcing and generator emissions failed to pass in the same session. A bipartisan group of senators who had long pushed to repeal the exemption outright called the tax a partial win at best, while electrical workers' unions lobbied against repeal to protect construction jobs.
Unlike sales taxes paid once when equipment is purchased, the new tax applies every month a qualifying data center operates, making it an ongoing operating expense rather than a capital cost. A similar operating-versus-capital question sits at the center of a separate rate dispute in Georgia, where regulators are investigating whether large-load customers are covering their share of ongoing fuel costs.
Virginia's approach leaves one of the country's most valuable data center incentive programs largely intact while adding a new operating cost tied directly to electricity consumption. Whether lawmakers extend the tax beyond its July 2028 sunset will determine whether the Commonwealth views the measure as a temporary budget compromise or a permanent feature of doing business in the nation's largest data center market.
