Four months. Three failed sessions. One "data center diva" insult. Dozens of dramatic headlines.
And on Friday evening, June 19 — with 11 days left before Virginia's first-ever government shutdown — it ended.
Virginia Democrats agreed to impose a new energy tax on data centers, resolving a months-long budget impasse that threatened the state's first government shutdown. Data centers would face a temporary tax on their power use — costing the industry an estimated $600 million per year — under a budget agreement reached Friday by state House and Senate leaders. The deal maintains the industry's sales tax exemptions, which are worth nearly $2 billion a year and had been at the center of the intraparty standoff.
The Senate convened at 10 a.m. and the House of Delegates at 2 p.m. today — June 22 — to vote on the conference report. If passed, it goes to Governor Spanberger for her signature.
Virginia is about to have a budget. And the data center sales tax exemption survives.
The compromise that ended four months of deadlock is elegant in its structure — it gives both sides something real without either side fully winning.
The budget agreement levies a Data Center Electricity Consumption Tax of $0.011 per kilowatt-hour of electricity consumed per month. The State Corporation Commission will collect the tax. No more than $600 million of the proceeds shall go to the general fund.
The key details:
While technically a compromise, Senate Finance Chair Lucas's push for data center revenue resulted in more going to state coffers than in her original proposal, which would have added $977 million in revenue for the two-year budget. The new energy tax is expected to generate $1.2 billion over the biennium. The Sales Tax People
Lucas won on revenue. The House and governor won on the exemption. Neither side got everything — which is exactly what a compromise looks like.
Senate Finance Chair Louise Lucas was the driving force behind the upper chamber's push to tax data centers more aggressively. She spent the past week touring the state on a "data center listening tour" soliciting public grievances against the sector's expansion in Virginia.
The Senate came into this fight wanting to eliminate the sales and use tax exemption entirely — generating nearly $2 billion per year in new revenue. What it got instead is $600 million per year from an energy consumption tax — with no guarantee the tax continues after this two-year budget cycle.
Budgeters including Gov. Spanberger would likely need to replace the $1.2 billion the new energy tax is set to generate during the next budget cycle — meaning the 2028 budget fight could replay many of the same dynamics as this one.
Lucas and the Senate also won a study mechanism. The budget creates a Joint Subcommittee on Tax Policy to study the sales and use tax exemption and report recommendations to the General Assembly by December 15, 2026.
That December 15 report — not the commission's November 1 deadline from the House's earlier proposal — becomes the foundation for whatever the 2027 session does with the exemption.
The House and Governor Spanberger came into the final stretch with one non-negotiable: preserve the sales tax exemption. They got it.
The deal maintains the industry's sales tax exemptions, which are worth nearly $2 billion a year. Spanberger and House Democrats were against the Senate's initial bid to repeal the sales tax exemption, arguing it would amount to breaking a contract and could hinder Virginia's business climate.
The energy consumption tax — while a new cost for data centers — is structured differently from the sales tax exemption fight. It's a tax on electricity consumption, not on equipment purchases. It doesn't touch the core incentive that data centers used when making their original Virginia investment decisions. And with a cap at $600 million per year, the industry's exposure is bounded and predictable.
House lawmakers had consistently cited how data centers support 74,000 jobs in Virginia and generate more than $2 million in local tax revenue — arguments that ultimately carried the day on preserving the exemption itself. The Sales Tax People
The data center industry is not celebrating.
The Data Center Coalition asserted that Friday's deal — which would cost the industry $1.2 billion over two years — would "raise costs on Virginians and Virginia businesses, drive away investment and job creation, and tarnish Virginia's reputation as a reliable partner and a good place to do business." "The message to businesses in all industries is clear — Virginia is no longer a reliable partner," the trade group said. The Sales Tax People
That reaction is expected and somewhat ritualistic — industry groups always oppose new taxes. But the "no longer a reliable partner" framing is worth taking seriously, because it's the argument that will drive investment decisions at the margin.
A hyperscaler deciding between Virginia and Texas for its next campus doesn't just look at tax rates. It looks at political risk — the likelihood that the rules will change unexpectedly. Virginia's four-month budget war, even though it ended with the exemption preserved, injected uncertainty into what was previously one of the most stable investment environments in the country.
Whether that uncertainty changes actual investment decisions is something the December 15 subcommittee report will attempt to measure.
The data center fight dominated the headlines — but the $207 billion two-year budget contains significant spending and tax changes beyond the energy tax.
The budget puts $1.5 billion toward 4% pay raises for public school teachers and 3.5% raises for state employees, $137.6 million for additional Child Care Subsidy Program slots for families making up to 85% of state median income, and adds an additional $159 million in school construction grants. The Sales Tax People
It includes a permanent increase to the standard deduction — from $8,750 for single filers to $9,200 in taxable year 2027 and $9,300 in taxable year 2028, with joint filers increasing from $17,500 to $18,400 to $18,600. Nearly $1 billion has been allocated as a contingency reserve to cover anticipated gaps from reduced federal funding.
The budget gives all localities the option to hold a referendum to ask residents if they want to create a new 1% sales tax that would be used to fund school construction. It also includes the deal for the creation of a recreational retail marijuana market, with sales starting July 1, 2027.
That local 1% school construction sales tax option is quietly significant for businesses. If localities across Virginia begin holding referendums and approving new 1% sales taxes, the rate landscape in Virginia could shift significantly over the next several years — adding address-level compliance complexity for any business selling into multiple Virginia jurisdictions.
For businesses operating in or selling into Virginia, here's exactly what changes — and when.
The data center energy consumption tax:
Data center operators will pay $0.011 per kWh consumed monthly, collected by the State Corporation Commission. This is an operator-level tax — not a sales tax collected from customers. Data centers need to understand their monthly kWh consumption and build the new cost into their financial models immediately. The tax applies for the two-year budget period beginning July 1, 2026.
The sales tax exemption — unchanged:
Data centers that qualify under the existing rules — $150 million investment, 50 jobs — continue to receive the sales and use tax exemption on computer equipment and software purchases. No change to their sales tax compliance setup for equipment purchases.
The local 1% school construction option:
Watch for referendums in your operating jurisdictions. If a locality where you have customers or operations approves a new 1% school construction sales tax, your rate for that jurisdiction increases by 1 percentage point. These referendums could happen at any point — build a monitoring process into your Virginia compliance calendar.
The December 15 subcommittee report:
This is the next major milestone in Virginia's data center tax story. Whatever the subcommittee recommends about the sales and use tax exemption will shape the 2027 legislative session — and potentially trigger another fight about the exemption's future. Data center operators should engage with the subcommittee process now rather than waiting for its findings.
We said it in February when this story started, and it's still true now: Virginia's resolution sets a template for how other states handle the data center exemption question.
The success of Virginia's approach — levying a new tax on energy consumption rather than eliminating the equipment exemption — could become an example for other states.
Georgia is staring at $2.5 billion in data center exemption costs. Pennsylvania is weighing whether to touch its own exemption as part of its budget fix. Texas is expanding its data center footprint aggressively while other states watch.
Every one of those states now has a Virginia model to reference: preserve the investment incentive, create a new consumption-based revenue stream, study the long-term picture, and revisit in two years. It's not a perfect solution — the industry hates it and the Senate only got part of what it wanted. But it avoids the political and economic risk of abrupt exemption elimination, and it generates real revenue without breaking the promises Virginia made to the industry in 2008.
Whether other states follow the model — or go further — will be one of the defining sales tax stories of 2027.
Operating a data center in Virginia or a tech business affected by Virginia's new energy consumption tax? Book a free consultation with our team at sales.tax. We'll walk through exactly what the new tax means for your cost structure and compliance obligations beginning July 1.