Virginia is now charging data centers a tax on energy use, thanks to a Commonwealth budget compromise that’s leaving few people happy.  

As of this scorching July, data centers across Virginia have to pay $0.011 — a smidge over a penny — for every kilowatt hour of power they use. Collected tax money is limited to $600 million per year, as laid out in the $207 billion biennial spending plan. Reasons for discontent with the plan depend on who’s asked, but it doesn’t seem to satisfy lawmakers, environmentalists or developers.

Across the US, concerns are rising about the industry’s rapid growth. Seven in ten Americans say they would oppose a data center being built near where they live, per a recent Gallup poll. 

Some lawmakers wanted to eliminate the nearly two-decade-old sales tax exemption for data centers.

Virginia is home to 633 data centers. It’s considered the largest concentration in the world, a situation that arose thanks to extensive internet infrastructure, historic ease in permitting that’s now more restricted and tax breaks. Most are in the northern part of the state in what’s known as Data Center Alley.  

Legislation to regulate the data center industry was a flashpoint in this budget cycle, so much so it almost caused a partial government shutdown.  

Some lawmakers wanted to eliminate the nearly two-decade-old sales tax exemption for data centers, which applies to computer equipment and software. It’s estimated the state will forgo $1.3 billion during this fiscal year because of that incentive. 

When efforts to nix that stalled, legislators put forward this energy tax, and Gov. Abigail Spanberger signed it into law. The tax expires in 2028.

➡️ Jump to a section:
• What are people saying about the tax? 
• What exactly will be taxed?
• Who’s paying?
• How will the tax be collected and enforced?
• Why is there a $600M annual cap on revenue from this tax?
• How does the cap work?
• Where is the money going?
• Are other states doing this?
• What other data center things are in the state budget? 

What are people saying about the tax? 

The Data Center Coalition, an industry membership association, slammed the tax, saying it will drive away investment from the state. 

Arif Gasilov, an energy and sustainability researcher, questions that claim. Other incentives for data centers exist in Virginia, he noted, including a nearly two decade sales tax exemption on some computer equipment and software used in the facilities. That exemption still stands.

“One cent per kilowatt-hour is pretty minimal compared to the actual electricity costs,” Gasilov told Technical.ly. “I believe that’s a bluff, and that’s not actually going to stop investment.”

Environmentalists including the group Clean Virginia say this tax won’t accomplish enough, citing that sales tax exemption and the fact that there are other programs to ease corporate income tax liability. 

What exactly will be taxed? 

This tax applies to data center operators using electricity provided by a utility, cooperative and other service providers. That includes renewables like wind and solar, per the law firm Greenberg Traurig. 

Data centers supplying their own power will also be liable for this tax and must log their use and send documentation to the state’s Department of Environmental Quality.

The tax is focused on structures with systems like cloud computing, data storage and AI processing. Internet service providers will not be liable for this tax, per the budget. 

Who’s paying? 

The company that’s already paying the energy bill is legally responsible. 

Data centers often have multiple tenants in a building, and these landlords may pass down costs to tech companies using the facilities, per the law firm Williams Mullen. 

How will the tax be collected and enforced?

For data centers buying electricity from a utility like Dominion Energy (which is undergoing a possible merger with another utility), the power company will collect the tax and remit it to the State Corporation Commission (SCC). The tax will appear as a line item on the monthly utility bill, per Greenberg Traurig. 

If the data center is supplying its own electricity, the operator needs to calculate what’s owed and pay the tax directly to the SCC. 

In addition to writing the monthly check to the state, these companies also have to file a report detailing self-generated usage quarterly to the state’s environmental agency to verify how much energy is used. 

While the tax starts in July, companies will not have to pay until September so SCC has time to establish the process, per Greenberg Traurig. 

Why is there a $600M annual cap on revenue from this tax?

It’s part of the compromise. Conventionally, taxes are thought to scare away developers of any industrial facility — theoretically, they could decide to build in a different state that lets them keep more profits. 

But as pointed out by Gasilov, the researcher, Virginia’s existing tax applies to equipment inside data centers, and the state is still home to the highest number in the nation.

In the end, lawmakers and Gov. Spanberger agreed on the $600 million annual figure to keep operators in the state while generating about half of the money projected to be lost out on the sales tax exemption. 

How does the cap work? 

Because there is a cap on how much can be collected per year, any extra funds collected will be returned to the company that directly paid the tax at the start of the next fiscal year. 

It’ll be redistributed via a “pro-rata share” formula. For example, If a massive hyperscale facility consumed enough electricity to account for 2% of the total data center electricity taxes collected across the entire state that year, that facility’s operator is legally entitled to receive 2% of the total overflow money refunded.

Funds will be sent back to utilities, which are responsible to refund the data center operators, according to the law firm Williams Mullen. No interest is payable on those refunds. 

For data centers supplying their own power, the SCC will refund the company directly. 

Where is the money going?

The up to $600 million collected each year will be deposited into Virginia’s general fund. That means the funds could be used in many different ways, including in increasing funding for public schools and tax relief for residents. 

Are other states doing this? 

Energy consumption taxes haven’t been explored by many jurisdictions. Oregon this year is implementing “surcharges” for large load electricity use. The collected funds will fund programs that could offset residential customer costs in the state. 

Lawmakers in several localities are pausing data center construction, including nearby Prince George’s and Montgomery counties in nearby Maryland. A state level moratorium bill failed in Virginia. 

Moratoriums have been critiqued by experts for little guarantees it would alleviate rising utility bills.  

What other data center things are in the state budget? 

Lawmakers are calling for more reporting and outlining restrictions for the data center industry. 

Virginia’s Department of Environmental Quality is required to establish criteria to establish places where data centers could harm water quality and quantity, ultimately to limit the infrastructure’s water use. That department is also ordered to create regulations around noise levels.  

Both the environmental department and the SCC must collect more information on data center  operations including real-time water and backup diesel generator use. 

Lawmakers are also mandated to meet to review sales and use tax exemption — which was the center of debate in this cycle.