by Steve Haner

Virginia’s world-leading data center industry, once a source of economic pride to our Commonwealth, has become the scapegoat of the 2026 General Assembly. The State Senate and House of Delegates have built different altars for its sacrifice.

The Senate is about to vote to strip away the major sales and use tax exemption which has helped make Virginia the center of this burgeoning industry. This would raise the taxes they pay by more than $1 billion initially and then up to $2 billion annually, an infusion of cash the Senate will happily find ways to spend. 

House Democrats have gone a different direction, keeping the exemption but making it conditional upon the industry adopting a fully Green New Deal energy policy. Ending any reliance on natural gas or diesel generation is the stated goal. Companies would be forced to buy renewable energy certificates on an even faster schedule than the Virginia Clean Economy Act requires for Dominion Energy Virginia and Appalachian Power Company.  

And both chambers have approved versions of legislation that will allow the State Corporation Commission (SCC) to assign 100 percent of the future costs of Dominion Energy Virginia’s energy capacity purchases and transmission upgrades onto that one industry. There is no reason that approach will not spread beyond Dominion if the SCC goes along, given politicians are already bragging this will lower bills for everybody else. 

These are just three of the many legislative efforts to regulate or outright discourage the industry which are still alive at the General Assembly, with three weeks left to sort out which will pass both chambers. 

The Senate’s effort to strip away the sales tax break and the House’s legislation to turn it into a renewable energy enforcement tool are mutually exclusive. Resolving that conflict might prove the most contentious issue as the two chambers seek to settle their differences before adjournment on March 14.  But a compromise that begins to phase out the tax break and keeps the new energy mandates attached in the meantime is possible. 

The sales tax exemption first created more than 15 years ago has always been tied to certain economic conditions, requiring in most cases that the facility had to invest at least $150 million in buildings and equipment and create at least 50 jobs. The performance targets are lower if the locality is considered economically distressed. 

The Code of Virginia is peppered with a host of similar sales tax exemptions for commercial and industrial concerns (the data centers are at the end of this long list), and all involved firms need to pay very close attention to what the House just did. If the state can impose energy restrictions on one industry by leveraging such tax breaks, it can do so to all of them. This is a powerful and very bad idea. 

House Bill 897 sponsored by Delegate Richard “Rip” Sullivan, D-Fairfax, has several moving parts, described in this article from Inside Climate News. The substitute language requires existing data centers to amend their performance agreements with the state to bring in the new energy efficiency standards, the procurement of renewable energy certificates (RECs), or entry into a power purchase agreement for supposed emissions-free electricity.

The many data centers served by rural cooperatives are not exempt, and they must purchase RECs meeting targets that are 10 years in advance of those that the Virginia Clean Economy Act imposes on Appalachian Power. Those that want their own behind-the-meter main power source cannot use natural gas. Those that already have natural gas or diesel backup generators will face new restrictions on using them, and a deadline for retiring them.

Every other industry with a special tax exemption should expect the same in their future if this becomes law.

Given that future, many in the industry may prefer the Senate’s plan and simply accept the early disappearance of this special tax treatment. The incentive’s success in building the industry here may earn it a place in economics textbooks, but an argument can be made that it has done its job and is no longer needed to secure new investments. The law has always carried a sunset date that implied it would not be permanent.

The Virginia Department of Taxation regularly reports on the effect of the tax exemption, which covers the state and local sales taxes imposed on purchase of “computer equipment or enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware, including chillers and backup generators.”

It covers the equipment purchased for a new facility, but also all the replacements and upgrades down the line. That is what has really driven up the value of the exemption, the tax break on refreshing the equipment over and over.

With more than 500 such data centers in the state now, it is no surprise that the exemption is saving the industry up to $2 billion per year, as reported by the Department of Taxation. But the report also compiles the other taxes still paid by the industry, mainly real estate tax on the buildings, annual business personal property tax on all that equipment and the taxes paid by their employees. The taxes collected from them exceed the value of the exemption.

The problem with trying to make the case to continue the incentive is the political reality that many Virginians do not like data centers now, certainly not those planned for their neighborhood and in some cases the animosity to the industry is general.

And why not? Many in the General Assembly and in the public are blaming them for rising electricity prices, which have many other causes politicians find inconvenient to discuss. Others resent that tax exemption and have big plans for spending the additional billions of dollars, unconcerned a golden goose might die on them. And a majority in the House now wants data centers to create a new front in the virtue signal war against hydrocarbon-fueled electricity, testing a strategy that could be used against other energy-heavy industries.

Scapegoats to carry away our own sins are so useful.