On June 29, 2026, Virginia’s 2026–2028 budget (the “Budget Bill”) was passed into law. The Budget Bill includes a provision imposing a tax on electricity consumed by data centers. Notably, the Budget Bill does not eliminate or reduce the existing data center retail sales and use tax exemption under Virginia Code § 58.1-609.3(18) (the “DCSUT Exemption”) for qualifying equipment used in data centers.
Overview of the Budget Bill’s Electricity Consumption Tax
One of the most contested provisions of the Budget Bill imposes a new electricity consumption tax of $0.011 per kilowatt-hour on electricity consumed by a data center (the “Electricity Consumption Tax”). The Electricity Consumption Tax applies on a monthly basis and is capped at $600 million annually for all taxpayers. Any Electricity Consumption Tax collected in excess of $600 million annually will be refunded pro rata. The Electricity Consumption Tax is set to expire after June 30, 2028, at the end of the two-year budget cycle.
Earlier proposals in the General Assembly would have repealed the DCSUT Exemption entirely on December 31, 2026. Virginia currently offers the DCSUT Exemption for certain computer equipment and enabling software purchased or leased for use in qualifying data centers that satisfy specified capital investment and job creation thresholds. The DCSUT Exemption is currently scheduled to remain in effect through 2035 and has been a significant driver of data center development in Virginia. The Budget Bill reflects a legislative compromise that leaves the DCSUT Exemption in place, although it should be noted that some legislators in favor of eliminating the exemption have pledged to revisit the issue as soon as 2027.
What This Means for Data Center Developers and Operators
The Budget Bill defines data centers to include facilities whose primary services are centralizing the storage, management, and processing of digital data, used to house server and network systems, systems for monitoring and managing infrastructure performance, power and cooling infrastructure with at least one megawatt of capacity, and associated security and environmental systems. Data centers do not include facilities whose primary function is to provide internet access or communications services as defined in Virginia Code § 58.1-647.
The Electricity Consumption Tax applies broadly to any person who owns, operates, or occupies a data center in Virginia, referred to in the Budget Bill as a “data center operator,” even if the data center operator is not claiming the DCSUT Exemption. A data center operator is subject to the Electricity Consumption Tax regardless of when the data center was opened or a lease to occupy the data center was executed.
Where multiple persons can be considered a data center operator for a single data center (i.e., the owner, operator, and tenants), the person responsible for the Electricity Consumption Tax depends on who is responsible for the data center’s utility account and whether any consumed electricity is self-generated. For utility-supplied electricity, the person responsible for payment of the utility account for the data center’s service point is responsible for the Electricity Consumption Tax. For self-supplied electricity (including electricity delivered to a data center without an incumbent electric utility), the person responsible for the self-supplied electricity is responsible for the Electricity Consumption Tax. For data center facilities expected to open prior to June 2028, owners, operators, and tenants should factor this additional cost into their leases and operating agreements, as well as the financings for such facilities.
While the Electricity Consumption Tax became effective July 1, 2026, the first collection of the Electricity Consumption Tax will occur in September 2026. The first collection payment due will include all Electricity Consumption Tax owed for the period from July 1, 2026, through September 1, 2026. The Budget Bill also requires electric utilities, electric cooperatives, and competitive service providers to list the Electricity Consumption Tax as a separate item on data centers’ billing invoices. Additionally, the Budget Bill directs the Virginia State Corporation Commission to issue guidelines on the Electricity Consumption Tax within 60 days of June 29, 2026.
Virginia remains the largest data center market in the world, being home to 35 percent of all hyperscale data centers and handling 70 percent of global internet traffic. This dominance is due in large part to the DCSUT Exemption, which has been used by roughly 90 percent of Virginia data centers and has been a critical factor in site selection decisions. While the Electricity Consumption Tax represents a meaningful policy shift against Virginia data center operators, the Budget Bill preserves the core tax incentive structure for Virginia data center operators—the DCSUT Exemption.
