On June 22, the Virginia legislature approved its 2026 biennial budget, which includes a first-of-its-kind tax on electricity certain data centers consume (HB 30, Item 3-5.24#1c). The tax rate is $0.011 per KWh consumed each month, beginning on July 1, 2026. The tax will last only for a two-year period, and will sunset on July 1, 2028.
The definition of the term “data center” for purposes of this consumption tax carves out facilities “whose primary function is to facilitate the provision of internet access service, a communication service…. or any combination thereof.” Since data centers whose primary purpose is to provide internet access or Voice over Internet Protocol communication services do not appear to be subject to this tax, it would seem that the primary target of this tax is intended to be data centers that provide services for artificial intelligence.
Virginia Data Center Electricity Consumption Tax: Scope, Rate, and Refund Provisions
This new tax applies to electricity provided by a utility and to self-supplied electricity, and there is no exception for self-supplied electricity from wind or solar. This is surprising since one of the strongest criticisms of new data center projects is the strain that they would place on the power grid and the emissions that would result from fossil fuel generated electricity.
The tax on electric power supplied by a utility or other third-party provider would be collected by the provider and remitted to the state on a monthly basis (just like other types of taxes on electric consumption). The tax on self-supplied electricity is to be remitted by the data center operator on a quarterly basis (rather than the monthly tax report and payment for electricity provided by a third party).
The tax is to be reported and remitted to the State Corporation Commission (not the Virginia Department of Revenue). Although the tax is to be paid monthly, beginning with electricity consumed beginning on July 1, 2026, the initial tax returns and payment of the tax will not be required until September 2026 to give the State Corporation Commission time to issue guidelines (including the actual tax return to be filed).
A rather unusual feature of this tax is that once the aggregate amount of tax revenue received for all data center electric consumption exceeds the aggregate amount of $600 million in a fiscal year, the excess is to be deposited into a fund and refunded to the third-party provider, who in turn will refund to their customers based on the pro-rata amount of electricity consumed by such customer. For example, if the state collects a total of $650 million in aggregate electricity consumption for the July 1, 2026 – June 30, 2027, fiscal year, then $50 million in the aggregate would be refunded. If a data center’s consumption amounted to a total of 1% of the aggregate taxes collected during the fiscal year, then such data center would receive $500,000 refund (1% of the aggregate $50 million to be refunded).
Reporting, Remittance, and Compliance Requirements for Data Center Operators
The Virginia legislature has been discussing whether to repeal its sales tax exemption for the purchase of data center equipment, but it decided on this electricity consumption tax instead. It appears that this tax is not intended to discourage the development of new data centers - which is becoming a politically difficult topic around the United States due to their strain on the power grid – but rather a way to generate just enough revenue to balance the state’s budget. Otherwise, there would not be a provision to refund the aggregate tax collected in excess of $600 million (and otherwise, the tax would not sunset after July 1, 2028). Most states tax certain products that are considered undesirable – such as cigarettes and alcohol – but those “sin taxes” generally do not provide for an upper limit. Virginia is not treating data center electricity consumption – and the strain on the power grid – as a sin tax (especially since the tax applies to renewable energy consumed by a data center).
New Water Usage and Cooling System Regulations for Virginia Data Centers
The budget also includes an amendment requiring the Department of Environmental Quality (Department), no later than July 1, 2027, to establish criteria for the Department to determine “Cooling Water Scarcity Areas” where the evaporation of water used for cooling purposes may have a detrimental effect in the quantity or quality of water available for other beneficial uses. Once identified, data centers in a Cooling Water Scarcity Area must use air cooling, closed loop cooling systems, or more efficient cooling systems that become available to the maximum extent practicable. The amendment focuses on the Eastern Virginia Groundwater Management Area, requiring that all new data centers submitting a complete air permit application to the Department after Jan. 1, 2027, either use air cooling systems, 100% recycled water and/or stormwater, or a closed loop system for cooling. Finally, by Oct. 15, 2026, the amendment requires the Department to conduct a study and provide a plan on retrofitting existing data centers in the Eastern Virginia Groundwater Management Area to use the same cooling systems that will be applicable to new data centers after Jan. 1, 2027. The amendment adds to a growing list of states that have enacted similar water-related requirements. Because the amendment affects both new and existing data centers, the Department’s implementation actions may have significant implications, including for retrofitting existing data centers.
While other states have recently repealed or suspended their sales tax exemption for the purchase of data center equipment (Maine recently repealed its sales tax incentive, and Ohio, Illinois and Arizona have suspended theirs), Virginia has chosen a different path. It is possible that other states may follow this lead and impose their own tax on electric consumption.