• Tension: Virginia’s legislature spent months fighting over whether to keep a data center sales tax exemption that saves the industry an estimated $1.9 billion a year, and ended the standoff by keeping the exemption and taxing something else instead.
• Noise: The resolution has been covered as a win or a loss depending on which side is talking, when the more interesting fact is what the legislature chose not to touch.
• The Direct Message: Virginia didn’t decide whether data centers should keep their tax break. It decided to charge them for electricity instead and put off the harder question until November.

To learn more about our editorial approach, explore The Direct Message methodology.

Loudoun County, Virginia, now holds roughly 200 data center facilities on close to 50 million square feet of floor space, according to City Journal. That single county anchors the densest concentration of data center capacity on the planet, and the state built around it is still deciding how much that industry owes in return.

On June 29, the Virginia General Assembly finalized a two-year budget that ends a months-long impasse over data center taxation, according to Virginia Mercury. The state’s sales and use tax exemption for data center equipment, the subject of the entire fight, survives untouched. What changed is a new tax on the electricity data centers consume, plus water and noise rules the industry hadn’t faced before.

Virginia’s data center sales and use tax exemption waives a levy of 5.3 to 7 percent, depending on locality, on the computer equipment facilities buy when they invest at least $150 million and create 50 jobs. The state’s own accounting puts the current cost at $1.9 billion a year in forgone state and local revenue, a figure that has become the reference point in data center tax fights well beyond Virginia’s own legislature.

Senate Finance Chair Louise Lucas, D-Portsmouth, wanted to end the exemption outright, eight years ahead of its scheduled 2035 expiration, and redirect the revenue to education, transportation and local governments. She initially sought the full $1.9 billion; by April she had lowered that ask to $1.6 billion, telling Virginia Mercury she wanted the revenue “perpetual and ongoing,” with no cap. House leaders and Gov. Abigail Spanberger pushed back, arguing that unwinding incentives already promised to companies risked Virginia’s reputation as what House Speaker Don Scott called “the leader in the world” for data center investment. Spanberger, at an April groundbreaking for a data center equipment manufacturer, said “the fact that Virginia is a reliable partner matters as much as the incentives we put on the table.”

The budget that passed both chambers on June 22 by a 23-16 Senate margin left the sales tax exemption in place and introduced something new instead: a $0.011 per kilowatt-hour tax on data center electricity use, capped at $600 million a year and $1.2 billion over the two-year budget cycle, with any amount collected above the cap refunded to the companies that paid it. Sen. Scott Surovell, D-Fairfax, described it as a first step rather than a resolution: “We have more data centers than anywhere else in the entire world, and I think the entire country is looking to us to set policy on this, and we’ve taken the first step this year, in terms of generating some more revenue.”

The gap between the two figures is the story. A $600 million cap on a $1.9 billion exemption means the industry is still net ahead by well over a billion dollars a year, even before accounting for the local property tax revenue data centers already generate. Lucas has been explicit that she does not consider this settled. The budget also creates a work group tasked with studying how the sales tax exemption itself might eventually be phased out, with a report due to the General Assembly in November to inform bills for the 2027 session.

Beyond the energy tax, the budget imposes Virginia’s first noise standards on data centers, with the Department of Environmental Quality required to set decibel limits by 2029 and fines of $32,500 a day for violations once the rules take effect the following year. It also directs the state to identify water-scarcity areas by July 2027, and requires data centers in those areas, and in the Eastern Virginia Groundwater Management Area east of Interstate 95, to demonstrate minimized water use for cooling by 2032. Gov. Spanberger amended the water language to permit some evaporative cooling in combination with more efficient methods, a change Sen. Danica Roem, D-Prince William, argued was too vague to enforce, and Sen. Richard Stuart, R-King George, argued undercut what he called one of the conference report’s most significant conservation measures.

Even as the legislature moved on, the underlying cost allocation question kept surfacing in a separate venue: the State Corporation Commission. Dominion Energy is seeking to recover roughly $1.5 billion in transmission line costs from ratepayers, and the governor’s office has argued, through Chief Energy Officer Josephus Allmond, that costs triggered “but for” the presence of large data center customers should be billed directly to those customers rather than spread across residential bills, according to Virginia Mercury. Dominion’s own 2024 resource plan lists 203 transmission projects, and the commission’s staff has said data centers are the single largest driver of both the utility’s load forecast and its transmission spending. The SCC has until Aug. 1 to rule.

That fight, over who pays for the wires rather than who pays sales tax on the servers, is arguably a more direct test of whether Virginia intends to shield residential ratepayers from the cost of hosting the industry. It is being decided by regulators, not legislators, on a timeline that has nothing to do with the budget cycle that just closed.

The reason Virginia’s legislature moved as cautiously as it did is visible on the ground in Loudoun County, where data centers generate nearly half of all county tax revenue and, according to City Journal, are expected to produce close to $1.3 billion in property taxes in the fiscal 2027 budget alone — more than the county spends on every function outside its school system combined. That revenue has let Loudoun cut its homeowner property tax rate by roughly 40 percent over the past decade while funding schools, parks and public safety improvements that a lower-revenue jurisdiction couldn’t afford. It is also why an industry group like the Data Center Coalition, whose president met with lawmakers in closed-door sessions during the standoff, has more leverage in Richmond than in states where the concentration is thinner.

The same density that generates that revenue is what put roughly 200 buildings in one county, made the electric grid the binding constraint on hosting more of them, and turned the fight over who pays for that grid into the more consequential question the budget deal left for regulators to sort out on their own.

Virginia’s legislature spent the better part of a year deciding not to touch its largest data center tax break, then spent the next several weeks watching a state agency decide, separately, whether the industry should pay for the power lines it needs. Both fights are proceeding on the assumption that the buildout continues at its current pace. Neither has settled who absorbs the cost if it doesn’t.