Virginia lawmakers have approved budget legislation that imposes a new electricity consumption tax on data centers while preserving the industry's existing sales tax exemption. The first-of-its-kind tax tied directly to data center electricity consumption won approval in both chambers and now heads to Governor Abigail Spanberger.

The budget establishes a data center electricity consumption tax of $0.011 per kilowatt-hour (kWh) on all electricity consumed by data centers beginning July 1, 2026. Legislative budget documents estimate the tax will generate $600 million annually for Virginia's general fund over the next two years. The measure applies to electricity supplied by utilities, competitive retail providers, and self-generated power sources, including behind-the-meter generation.

Virginia, particularly Northern Virginia, is the largest data center market in the US and a bellwether for the industry. Known as "Data Center Alley," the region hosts a significant portion of the world's internet traffic and is home to major hyperscale facilities. This makes the state's policy decisions highly influential for the broader data center sector.

The final shape of the bill differs significantly from a Senate proposal released June 17, which would have taxed backup generators based on permitted capacity and was projected to raise roughly $1.8 billion over the biennium. Budget negotiators instead adopted an electricity consumption tax projected to generate about $1.2 billion over the two-year budget cycle. Lawmakers left the state's sales and use tax exemption for qualifying data center equipment intact while adding a new tax directly tied to power consumption.

A continuously operating 500 MW facility would owe roughly $48 million annually under the tax. A 1 GW campus would owe nearly $100 million before any refunds. The tax amounts to a little more than a 10% increase in effective electricity rates for data centers, according to Rob Gramlich, president of Grid Strategies, a power sector consulting firm.

The legislation includes a unique refund mechanism: if annual collections exceed $600 million, the excess will be placed in a special fund and returned to data center operators in proportion to the taxes they paid. Under the budget language, the State Corporation Commission would collect the tax monthly and develop implementation guidelines within 60 days of the budget's passage.

The budget package also includes a utility rate carveout for certain large-load customers, but data centers are explicitly excluded. The provision applies to manufacturing, industrial, and distribution facilities with electric demand of at least 25 MW and a workforce of at least 200 employees. Participation is capped at 150 MW of aggregate demand unless the State Corporation Commission determines a higher limit is in the public interest. "It is not typical to exclude data centers or data storage from industrial rate classes," Gramlich noted.

Former FERC Chairman Mark Christie characterized the measure as an offset rather than a fundamental change in state policy. In a LinkedIn post following the budget agreement, Christie wrote that "data centers still keep the existing tax subsidies from the state, they are just offset by this new energy consumption tax." However, Christie argued that the new tax does not address the broader question of who ultimately pays for the generation and transmission infrastructure needed to serve growing data center demand, stating that the measure "will do nothing to protect residential consumers from cost-shifting to them for all the new generation and transmission assets that must be built."

Gramlich pointed to a separate issue involving utility investments made before large-load customers are fully committed. "Dominion does not actually charge the data centers until they are close to complete, which means expensive investments are being made before there is any certainty or commitment from customers," Gramlich said. "I would have expected that gap to be filled in any new policy."

As the largest data center market in the US, Virginia's new tax policy could set a precedent for other states grappling with the balance between incentivizing growth and addressing infrastructure costs. The industry will be watching closely to see how this measure impacts operations and investment in the region.